Fool Article on Haliburton

I wasn't aware of any company specific reason to like HAL over SLB, but this article gives some reasons why HAL has lagged the big three, the other one being BHI.

http://www.fool.com/investing/value/2007/11/29/halliburton-a-strengthened-oil-competitor.aspx

If OPEC doesn't increase production quotas at its meeting next week as expected, I believe crude oil prices will go upwards. Today crude is down below $90 for the first time in a few weeks. The ride should be scary because of all those 'speculators' and 'hedgies' driving up the price of crude beyond what the marginal cost of production is. The fact is that the marginal cost of production is increasing.

I say we use the anticipated volatility to pick up on some of these international oil service companies.

Credit crunch, crunch, crunch

http://www.theglobeandmail.com/servlet/story/RTGAM.20071123.wrfairfaxmarket23/BNStory/Business/

I just like Prem Watsa's clear talk on all this subprime fiasco: "If I'm an investor, why would I ever buy something where the credit decision has been delegated?"
Almost makes me want to buy FFH... almost.

But I guess I'm not quite as bearish as Mr Watsa, or Mr Minyan, (or Mr. Lam?) ;)
Don't hold your breath waiting for some bank to go belly-up. The whole point of CDO's is to spread the risk to any and all institutions willing to take on the risk for yield. So the loans are off the lenders' balance sheets, and the loses are spread around everywhere, from BNP Paribas to HSBC to Northern rock, etc. So unless some bank has been blatantly ignored their BaselII requirements and putting all their eggs in these SIVs, I highly doubt any big bank will go down.
Unfortunately, the ratings agencies were too cozy with the makers of the products which put them in a position of conflict. There will be a shakeup the ratings agencies, and the way they price the structured products, if the market still exists going forward.

Yes, liquidity has dried up for structured products which makes valuations difficult, but it doesn't mean they are worthless. Foreclosed mortgages are backed real/hard assets: the homes. Yes, there is a US housing slump but the homes are not worth $0. I heard Gerry at Onex has hired 3 really, really smart guys in distressed debt to value and buy these assets. (also, he needs something to do since private equity has dried up too.) Almost makes me want to buy Onex... almost.

I believe the Economist estimated that the size of sub-prime mortgage business was about $450Bil with losses of about $150Bil. By my rough calc, the market cap of US banks which make up the S&P Financials total $2000Bil, after a drop of 25% from the summer. That means roughly $660Bil of market cap has been wiped out in the US banks. So including all the banks around the world, that's at least $1Trillion in market cap wiped out in the past 3months. Now this doesn't take into account the credit contagion and the costs of a recession (which is much higher) but $1Trillion is alot of market cap down the drain for a one time (non-recurring) loss.
So if you accept my premise that the value of a company is the NPV of all future earnings, then this is an over-reaction.
The one thing that always makes me suspicious about permabears like Minyan and Watsa is they say this downward spiral is going to last 15years, without giving the precise reasons why. In down markets like this, I always recall the wisdom of W. Buffet "... through 2 world wars, a great depression, Vietnam, OPEC oil embargo, stagflation, junk bonds, hyperinflation etc. the market has perservered..." to generate significant economic returns. Is it "different this time"?

If there's anything harder than picking the bottom, it must be predicting the shape of the bottom! :) I have no idea whether it's going to be a V, U or W, but by my rough calcs, I see significantly better than market returns in 1 year time frame for XLF. The bears have already missed a 8% bounce in the past two days, I suggest we buy on weakness in the coming days.

Picking the Bottom

Further to our discussions about when to take the dip and buy into an unloved sector, I found this article about credit cycles:

http://www.minyanville.com/articles/FRE-FNM-C-BAC-CFC/index/a/15019

Although I was not an investor in 1987-1991, I am peripherally aware that there are other examples of previous credit contractions where financial companies really suffered. So far prior to Citi selling a 4.9% stake in itself, the only thing to have happened to financials in the U.S. is a drop in their stock prices. The article suggests that previous bottoms in credit cycles actually had defaults and insolvencies. Maybe today's Fed wouldn't allow such a default as this would do much to destroy confidence, but even the Fed can't monetize all the bad credit sloshing around can they?

I highly doubt that the bottom of this credit cycle will be a sharp 'V' shape. Something more like a prolonged 'U' shape with at least all the major magazines devoting a cover page to the "credit disaster" would qualify more as the bottom in my opinion. If we're in the denial phase as the article suggests then we still have to look forward to the blame stage (class action lawsuits vs. the bond rating agencies etc.), and then the clean up stage (new legislation/regulation like Sarbanes-Oxley). I think investing around this stage will decrease the risk but at the cost of not picking the bottom perfectly!

I love investing part-time! I think what I want because its my own money! I don't know how these professionals do it?

Point of maximum negative sentiment

It's never easy to buy when everyone is selling, when all hope is lost, and there seems to be no end in sight. That's also when you make the most money.

http://biz.yahoo.com/ap/071126/citigroup_abu_dhabi.html

I foresee a big bounce Tues. XLF, or IYF anyone?

"Blood in the streets" picks

http://www.economist.com/finance/displaystory.cfm?story_id=10113339

I too look for "blood" to find some good buying opportunities. I got around to reading this article, which paints a picture of what may happen. I like the graph of mortgage CDOs in particular. we still have over $11K in cash ready to pounce when the blood is spilled. What are our options?
I usually like to play high beta and alpha stocks or ETFs. So yes, EEM, EWH, even RIMM and AAPL depending on how far they've dropped.
US banks? they've fallen so far, we could make some money on a dead-cat bounce. but this requires some timing.
I think earnings season is around the corner, so capitulation might be coming sooner than later. Shall we agree on some targets in prep for the volatility.

Aside question: can we trade options in our Etrade account ?? I'm thinking of a straddle play on RIMM prior to earnings.

Credit Contagion

Looks like the volatility has returned and no market has been spared. The Hang Seng is down 18% since hitting a high of 32000 last month. The Nikkei is down 16% from earlier this summer.

I'm starting to see the fear in the markets, but I'm waiting for the 'blood in the street' sign. It's amazing to see so much credit just evaporate. Easy come, easy go I guess.

Here's an article about China and Korea now being engulfed in the credit crunch contagion.

http://www.telegraph.co.uk/money/main.jhtml;jsessionid=TXULD4CQHTUFDQFIQMFCFFOAVCBQYIV0?xml=/money/2007/11/21/bcnasia121.xml

Another perspective on oil prices

http://www.reportonbusiness.com/servlet/story/RTGAM.20071121.woil_v2_1121/BNStory/energy/home?cid=al_gam_mostview

Hutchison Telecommunications Int. Ltd. HTX-NYSE

OK I'm working overtime tonight but this is my emerging markets play. This is a subsidiary of Hutchison Whampoa owned by the man many people in Hong Kong call 'Superman" - Li Ka-shing whose company owns 50.1% of HTX.

HTX recently sold an Indian wireless company Essar to Vodafone for $11 billion which according to news articles worked out to about $860 per subscriber. Recent worldwide deals for cell phone companies in growing markets pegged valuations at $500-700 per subscriber. Essar had over 22 million subscribers and cellphone penetration in India is still only 13%! HTX has had a history of building up wireless businesses and then selling them.

HTX paid a special dividend in July 07, paid down some debt and still has 3.4 billion in net cash. It's entire market cap is only $7 billion.

HTX still owns major cellphone operators in Hong Kong, Macau and Israel. It also has smaller but growing operations in Thailand, Vietnam, Indonesia, Sri Lanka, and Ghana. The penetration rate in Vietnam is 21%, Indonesia 35%, Ghana 12%, Sri lanka 21%. So far HTX has 3 million subscribers in these emerging markets. At $500 per subscriber this business is worth 1.5 billion.

The Israel portion of the business is through a majority ownership of Partner communications (PNTR-nasdaq) and its market cap is around $3 billion of which HTX owns half ($1.5 billion). This portion of the business according to what I can find is growing well.

Even though the H.K. market is fully penetrated its ARPU is still growing. Its hard to put a valuation on its H.K. business but they have 2.3 million wireless subscribers as well as a growing fixed line business! H.K must be the only place in the world where they are still growing wireline business.

Its Indonesian business is just ramping up. In the first 6 months of operation in Indonesia they gained 1 million new subscribers.

So, if you do the math I haven't accounted for the H.K and Macau operations and we get a sum of the parts close to its market cap, for arguably some good growth potential. Its strong financially and it has 'Superman' backstopping it all.

Our first purchase!

Gentlemen,
Today at around 1pm we became the proud owners of 100 shares of LLL @ $36 per share. The stock has been volatile over the past few weeks, mainly due to its high beta in a volatile market (and some seaweed fiasco), but I believe this is a good entry price in a great growth stock. We're off an running!

Emerging Markets

This is an analysis of the economy of the emerging countries. I found it very informative.

Emerging economies: Dizzy in Boomtown

Perhaps it can help us decide if we want to invest in emerging markets or not. Some of the options are:

- iShares MSCI Emerging Markets Index (EEM) if we want exposure to all emerging markets.

- CLAYMORE CAN BRIC SBI COMMON UN (CBQ.TO) if want to focus on BRIC

- S&P Asia 50 Index Fund (AIA) if we want to focus on Asia

I suggest taking a vote on whether or not we want to consider this. If so we can discuss the options in more details.

Peak Oil in the WSJ

Here's a front page article and a very nice summary about the issues facing the rates of production of oil. Notice I didn't say anything about reserves. It's all about the production rates.

http://online.wsj.com/article/SB119543677899797558.html?mod=hpp_us_whats_news

Of course if we find enough reserves then the production rate increases would come by easier but history has shown that we just aren't finding the same big fields as we used to. In fact one stat I've read says that currently we're only replacing one barrel of oil in reserves for every three that we burn.

Multinational Oil Services

Whether or not you subscribe to the peak oil theory or not, the geological facts are that the oil reservoirs discovered today are much smaller and more challenging to develop than in the past. Not only are the oil fields deeper or more remote, but they tend to have higher decline rates than the massive oil fields found in the first half of the 1900's. This geological dynamic bodes well for drilling and services companies that do most of the 'downstream' work i.e. drilling, well completions and management, and managing of geological data.

One company that is a global leader especially in the area of well completions is Halliburton (HAL). Yes this is Dick Cheney's former company and I'm sure he still owns shares. This is a multinational company that had revenues of over 22 billion in 2006. They operate in over 70 countries and last year 50% of their revenue came from overseas and the rest was from N.A. They even recently moved their corporate H.Q. to Abu Dhabi. Last year they spun off their construction unit (KBR) that was awarded lucrative contracts in the rebuilding of Iraq after the war - no doubt a political favour from the White House.

Although this is the old oil business, it is anything but an old industrial behemoth. It is a world leader in oil field technology and regularly churns out patents on its intellectual assets. Some of the world's most complex well completions have been performed by Halliburton.

In terms of financials, they have above industry rates of margin, ROE, and growth. Total debt is 0.45 of equity which isn't excessive. HAL compares very well to other industry leaders like Baker Hughes(BHI) and Schlumberger(SLB).

In my personal portfolio, I have a few Cdn. drillers and services companies, but none have the size or international diversification as HAL. I think this would be a good investment to have as our multinational company which derives much of its profits outside the U.S.

In the long term, if the world wants more oil and gas, they're going to have to drill for it.

Sunday night update

Well, the problem with the weekend is there's too much financial news to read and ponder, and confuse. So let me run down some ideas:

LLL: They announced they will remove the seaweed label tags in compliance with some Cdn Business Bureau. This has to be interpreted as some sort of admission of fault so I think the stock will drop Mon. I still have a limit buy order but I've changed the price from $38 to $36. I think we'll get it at a pretty good price before end of year.

GE: This was initially a play on the weak US$ and export competitiveness (and somewhat strong Cdn$). Their financial exposure worries me, because it's not so transparent. I would like to see a bit more research on GE before we jump on this. In the meanwhile, I'm open to some other names in this space. JNJ is also a value play in the long suffering big pharma sector.

EEM: I still like this play, not only for the high beta but more for the high alpha. If you check Yahoo!Finance Risk link, you'll see a high alpha of 4.30, comparatively. If there is some more volatility, I vote to pick this one up.

RKH: I think there's going to be some tax loss selling on the US banks in Dec, and it should be point of max neg sentiment. a good time to buy for the patient investor.

Two articles

I found these two interesting and relevant to our discussions:

Stockmarkets, Bullish

A yen for certainty

Re: Investment Decisions

All right, in that case it seems that every one is fine with LuLu. Eddie can you go ahead put a limit order?

We can further discuss GE and financials.

Arash

 

On Nov 15, 2007 1:29 PM, Desmond Lam <des.lam@rogers.com> wrote:

Hello All,

 

I just want to be on record as to believing that that the US financials have a ways to go yet before hitting bottom.  My vote is for LLL and GE notwithstanding its exposure to finance.  In fact I have no qualms about holding off on GE until the credit picture is a little clearer or a little bleaker.  In general I like the contrarian play of buying financials at their weakest point but I guess we differ on when the right time is.  If the vote comes down to buying US financials at this time, my vote is no but I will respect the majority.  Are we still looking at IYF or RKH?

 

If we all agree on LLL, can we make the first purchase of 100 shares at around the 50 day moving average of $40.50.  The price has been fairly volatile of late so I think it won't be a problem to put an order in at that level and waiting for it to be filled.  Any other ideas about filling the order?

 

Des

Re: Investment Decisions

Hello All,

 

I just want to be on record as to believing that that the US financials have a ways to go yet before hitting bottom.  My vote is for LLL and GE notwithstanding its exposure to finance.  In fact I have no qualms about holding off on GE until the credit picture is a little clearer or a little bleaker.  In general I like the contrarian play of buying financials at their weakest point but I guess we differ on when the right time is.  If the vote comes down to buying US financials at this time, my vote is no but I will respect the majority.  Are we still looking at IYF or RKH?

 

If we all agree on LLL, can we make the first purchase of 100 shares at around the 50 day moving average of $40.50.  The price has been fairly volatile of late so I think it won't be a problem to put an order in at that level and waiting for it to be filled.  Any other ideas about filling the order?

 

Des

An article from globeandmail.com

Ed (edkim98@gmail.com) thought you would be interested in the following article from globeandmail.com, Canada's leading source for online news:

"Parity is where the loonie should be"
We have a chance to invent a North American currency
<http://www.theglobeandmail.com/servlet/story/RTGAM.20071114.wrreynolds14/EmailBNStory/robColumnsBlogs/home>

Note from Ed: Just more fodder about the US$ and FX rates.


+----------------------------------------------------------------------+
Get the news delivered to your inbox. Sign up for our daily News Update:
<http://www.globeandmail.com/newsletter/>

Early Club Decisions

We had some constructive email discussion about GE, LuLu, and US banks so I thought I'd blog it for the record and further discussion. I think we all agreed GE would be a good first purchase, before Eddie wrote:
Seems I haven't done my due diligence on GE. I looked on their 10K and it seems a significant portion (1/3) of their revenue and profits come from GECS, yup GE capital.
Are they immune to the credit crunch?http://www.reuters.com/article/ousiv/idUSN1336416420070913?pageNumber=2

Arash said:
Well then isn't it just like investing 1/3 of our money in a US financial institution? That means that GE's stock too is affected by the credit crunch. It can be a good investment because of the same reason that we want to invest in US financials.
On a separate note, if I want to choose one from LuLu and US financials, I would vote for financials.

Des said:
GE's stock price has held up fairly well during this credit crunch. It is true a large chunk of their profit in recent years has been from financing. As the article from reuters suggested that non-traditional lenders like GE may have advantages over banks during times of tightening credit. It's hard to know what crazy loans might be on the books of GE Capital. GE really is a conglomerate and can't be classified as a financial but also can't be classified as an industrial either. I guess if we want financial exposure (which I'm quite negative about) then I would go with GE.

Between LLL and GE, I would actually pick LLL at this point. Sentiment recently has been down on this growth stock and if this is the growth stock of the next decade then I want some skin in the game! The game plan here would be to hold LLL for at least 1-2 years as it rolls out its new stores I presume?

In terms of UNG or FXY, these plays require lots of watching and a finger on the sell button so maybe not as appropriate for the club as an initial investment anyways.

Cdn Bank Writedowns

So this week CIBC, Royal, and then ScotiaBank wrote down some of their exposure related to the subprime mortgage debacle in the US. Specifically $463 million, $360 million, and $190 million. All three banks chose to announce on the same day one time gains because of the sale of VISA. Most of the gains from the sale of VISA conveniently 'offset' some of the one time writedowns. I'm not an accountant and when I read that none of these writedowns affect cash, I don't want to believe them. Last week GM wrote down $39 billion from their balance sheet of future tax credits that likely wouldn't be usable! Again this was non-cash so everything is OK right? I did a little sleuthing about what these write offs mean and here is a quote from someone more knowledgable than myself in these accounting matters:

Minyan Peter, a former treasurer at a very large US bank had this to say about the writeoffs:

Lost in all of yesterday's bank related news was General Motors' (GM) announcement that it was writing off $39 bln in deferred tax assets. For non-accountants (of which I am one), GM's deferred tax assets largely represented future tax benefits that the corporation had intended to apply as a credit against future income taxes.

In looking through GM's 2006 10-K, there does not appear to be any time limitations for these credits to be used. By writing off substantially all of these assets, GM (likely with encouragement from Deloitte) is effectively stating that its future earnings prospects are so uncertain that it may never have the opportunity to apply these tax credits against future taxable income.

While the corporation and the media would lead one to be believe that because this $39 bln write off is "non-cash", a deferred tax write-off it is about as clear a message about future earnings as you will ever see.

As I have previously written, the income statement is the past and the balance sheet is the future. When you see companies writing down balance sheet assets (which, by the way, will always be non-cash), they are telling the world that the future is not what they thought it would be. Whether the items are deferred tax assets, subprime CDO's, securitization gains, inventory, loans, securities or anything else on the asset side of the balance sheet, when they are written down (which, to be clear, an increase in loan loss provision is effectively doing), a corporation or bank is admitting that prior earnings were overstated and future earnings will be lower than they thought. Until the writedowns stop, it will only get worse.

There is also a good article about banks and the credit cycle here:
http://www.minyanville.com/articles/SKF-Texas+Commerce+Bank-banks-subprime-expectations/index/a/14058

So a hundred million or so here and there. The Cdn. banks are still well capitalized compared to some US banks. (and oh shit I didn't realize E-trade was a bank as well!) The yield on Citigroup is over 7% and the yield on Royal before today's spike was over 4%.

We live and work and spend money in Cdn. $ primarily so maybe sticking to home grown banks is the safest bet right now. Why speculate on the direction of the US/Cdn if you don't have to?

Unwinding of the Yen Carry Trade

I've been reading about the Yen carry trade for years and there has been much talk about when this would unwind. The scope of this borrowing in Yen and investing elsewhere in the world is unknown but thought to be very large. Much of the capital flow over the last few years has been into the American markets including government Treasuries, mortgage backed securities, as well as stocks. As the American markets increase in volatility, there is usually an increase in the value of the Yen, as funds and hedgies who are involved in this carry trade unwind their leveraged positions.

As the Cdn dollar, Euro and British pound have risen in the last few weeks especially, I have noticed that the Yen was steady at 114-116, despite the huge run ups in most other currencies that float vs. the US dollar. The last time the Yen broached 111 was during the first credit crunch in August. The Japanese are well known for their currency manipulations in the market.

I decided to check this correlation out and when I charted FXY (an ETF that tracks the Yen/dollar exchange) versus the S&P500 (top chart), there was an amazing negative correlation. I couldn't chart this back more than a year because I think the FXY hasn't been around that long. So the blue line is the S&P500 and the red line is the FXY Currency Shares Japanese Yen Trust. This was a 6 month chart. I also ran a chart of the S&P versus a different US dollar/Yen index (bottom chart) but there wasn't any specific symbol for this index as I think it is some index and not tradable but it has a longer price level history. Unfortunately I think this US dollar/Yen index has the numerator and denominator the other way around as compared to FXY because there is a good correlation positively.



Now, the Yen carry trade is a known phenomenon but I believe this correlation is profitable because the capital flows in the currency markets are so large that it is hard to arbitrage.

The other macro themes are in line for a higher Yen as well. The Fed appears to be penned into an easing mode which lessens the interest rate arbitrage between the US and Japan. The markets seem to be exhibiting higher volatility.

Even if only as a hedge against US stock exposure as well as US currency exposure, I think FXY has merit.

Des

Another article in the Globe about LuLu

Apparently this guy doesn't like growth stocks!


RIM's skid shows why growth stocks are sometimes Lulu

"... Consider Lululemon Athletica, the retailer of trendy yoga wear. The company went public in July at $18 (U.S.) a share and promptly saw its stock shoot skyward, briefly topping $60 last month. But it's been all downhill since then; yesterday, it closed at $41.66 on the Nasdaq stock market.

Even after the recent skid, Lululemon probably has further to fall. Analysts expect the company to make 35 cents a share in the year ending in January, so the P/E multiple is a ridiculous 119. Looked at another way, the earnings yield - the flipside of the P/E - is just 0.8 per cent. Would you invest in anything promising such a puny return? A lot of investors have done just that.

True, Lululemon is a growth company, so its earnings will rise. But even if we take next year's estimate of 58 cents a share, the stock is still trading at a lofty 72 times earnings. In other words, for every buck Lululemon is expected to earn next year, investors are willing to pay $72. We'll pass, thanks.

..."

Cross Border Shopping

I heard in the news that cross border shipment of packages has reached all time high. Everyone is trying to do online shopping as much as possible. Canada Post, FedEx and UPS are having problems to deal with the unexpected increase in demand. And the Christmas shopping season has not actually started yet…

Sounds like an investment opportunity!

That may lead to an increase in the 4th quarter revenue of companies like e-bay, Amazon.com, FedEx or UPS. Any suggestion?

Investing in the US Markets

The expected slow down in the US economy and the dollar fluctuations make investments in the US markets less appealing. I have an idea that may work in this situation:

Find a US company that
- Is healthy with fair growth potential
- Significant amount of its revenue comes from exports and international sales (large caps).
I did not research any particular stocks but examples could be P&G or Boeing.

Now if the US economy does slow down and the US dollar continues to drop, our company will not suffer, since much of its revenue come from sales in other countries and in currencies other than US dollar. This actually benefit the company since it magnifies the revenue in terms of US dollar. In addition, the drop in the US dollar increases the competitiveness of our company since its costs at home (e.g. research, head office, salaries) are in US$ and decrease compared to the international competitors.

As a different scenario, if the currency goes in the opposite direction (increase in the US dollar) then we will benefit since the value of the stock will increase in terms of Canadian dollar. In this case we have used the strong Canadian dollar to purchase assets in the US.

US Banks

Just to show I'm not a one trick growth pony, I'm thinking US banks are starting to how some good value.
* cross-border shopping: Cdn banks are buying US regionals
* PE's are much lower than Cdn banks, around 8 vs 13
* The credit crunch is being overplayed, since ML and Citi are overstating their losses (throwing the kitchen sink) to set up for better earnings going forward.
* The Fed is dropping interest rates, and has continuously signalled he will bail out the banks.
* All the big banks hit fresh 52week lows this week, so we have some time to monitor the new lows over the next few weeks.
* I'm no bank analyst so I suggest ETFs like IYF or RKH (Regionals) if we want to be slightly more conservative.

So I take back my Oligolopolistic Cdn banks strategy (too much trading), and replace with this value/contrarian one.
Thoughts?

Expectations and Branding

This is a follow up post regarding LULU as this has generated the most discussion. I believe this club is working well if you have to defend your thesis and in my opinion this is time well spent not "navel gazing". If this was a no-brainer then maybe I've missed the point.

The issue boils down to the fact that you believe that LULU is a strong brand and will continue to grow like other strong brands. This takes some level of forecasting and your confidence in it is maybe your 'investment bias'. My investment bias is that I am pessimistic about whether this is as strong a brand as other growth companies before it. I suppose only time will tell.

The second thing that guides me in my investing is expectation. As you know I'm not a great believer in EMH (efficient market hypothesis), but mostly that doesn't matter. If LLL is suffering from overhype be it from management, analysts, or the masses, then maybe it is over valued. The only thing that will propel this further is its growth in its brand. i.e. good earnings growth and not P/E expansion. There is a pratical limit to P/E expansion as there is with earnings growth (althought I don't know where this limit is)

Now with its recent drop last week, I believe sentiment maybe changing. A number of analysts have downgraded LLL to 'neutral' and UBS has downgraded it to sell. I love these analysts because they are almost always late and mostly wrong especially at turning points. Here is a link to the downgrade: http://www.newratings.com/analyst_news/article_1637586.html

This is when I love to do my investing. When the sentiment is down on a particular industry or stock. This maybe the best opportunity for this 'growth' stock with analyst downgrades and general market gyrations.

Crox and Anchoring

The popular maker of Crocs took it on the chin and dropped 36% yesterday after announcing that next year's top line revenue estimate wouldn't be increased as has been the usual. This company has had a phenomenal run over its short life since being public and has quadrupled in price!

http://online.wsj.com/article/SB119395987580779823.html?mod=googlenews_wsj

It has grown revenue from $24,000 in 2002 to $830 mil this year!

So here's my beef with valuing growth companies: if the value is just the sum of all future earnings discounted to present value -but those future earnings are growing at some unclear but very high rate you end up with a nebulous but high valuation presently. Its growing quickly so you pay more for that growth. Well how much more do you pay? It doesn't matter too much what you pay because its going to grow for a number of years at some very high rate. There is no anchor to any metric like earnings or revenue because it's all about the estimates of the future.

So in the case of Crox, you would have had a very nice return over the last 18 months if you could have forseen the story, even with yesterday's large drop. Why was there such a large drop? The article says that their projected revenue and earnings growth for next year will be only 35-40%. Good by many measures but when you're expecting hyper-growth and only deliver good growth, the price resets to some unclear valuation.

With cyclical and stodgy industries like TransCanada Pipelines for example, there is a more defined metric of value be it P/B or P/E, or yield. Obviously it is in a slow growing industry but you knew when its PE was at 20 it was getting lofty and at under 10 it was getting cheap and hence there is some anchor for that elusive valuation. You can guarantee that TRP wouldn't have dropped 36% in one trading day. That to me is risk.

On the other hand 300% over 18 months, now that's gravy! So is LLL up to the challenge? Can management navigate analysts expectations of future growth rates and make this thing take off like a rocket?