What Would Ben Graham Do Now?

Money talks. So does What Would Ben Graham Do Now? A New Value Investing Playbook For A Global Age, by Jeffrey Towson, published by FT Press. Scheduled to be released in early June (I received an advance copy), the book really differentiates itself from the pack of finance and investing books I've read of late. Full of fresh ideas, this insightful and informative publication is not what it seems on the surface.

From just looking at the title, I assumed as a retail investor I would be able to take out my spreadsheet and learn a few tricks. Well, I learned plenty of tricks, but they weren't meant for somebody in my modest income bracket. This book is best utilized by whales, sharks, movers and shakers, the big money dealers - whatever you want to call them - people in the position of financial power whether they be in a hedge fund, pension plan, Fortune 100 company, venture capital firm or private equity organization. That said, I thought What Would Ben Graham Do Now? was fascinating and that the writer made the most of his opportunity.

Towson is the former point man for Prince Waleed of Saudi Arabia, one of the richest men in the world. He developed over $15 billion of investments across multiple geographies which included the Middle East, North Africa and the Asia Pacific region for Waleed, nicknamed "The Arabian Warren Buffett" by Time Magazine. He is now the managing partner of the eponymous Towson Group based in New York, Dubai and Shanghai, and has culminated his experience into a part game plan, part textbook for those with deep pockets.

It is important to note that although this publication is meant to be a textbook, it reads more like a novel with Venn Diagrams and flow charts. Easily stated and understood, I would think that investors of all persuasions could benefit from this book if they are interested in where the global markets are heading in the next 20-30 years.

One of the many things I enjoyed about What Would Ben Graham Do Now? is that Towson doesn't go over old material. If you are a value investor, he assumes that you are already familiar with the teachings of Benjamin Graham and doesn't rehash old formulas, especially when breaking down financial statements. In fact, he spends very little time crunching numbers. His main piece of advice is to analyze a company's financials in the developing countries by turning back the clock and look at the balance sheet the way that accountants and analysts used to, not the income statement that is so popular in today's world. Reason being is that like America in the 1800's and early 20th Century, the developing countries are mostly industrial infrastructure and natural resource plays.

Although notable global tycoons like Prince Waleed, Warren Buffett and Carlos Slim have used their reputations to close sizable financial deals internationally (think Buffett negotiating a 10% stake in China's BYD), Towson believes that the best deals are done in smaller, privately owned companies. He likes to run into burning buildings and seeks opportunities everybody else avoids and utilizes what he calls "5 to 20" investments. This basically means you invest $5 million in a privately held family business that is selling below inartistic value, infuse good old American know-how in the form of better management or brand identity, then reap a $20 million profit - over the long term. There's no flipping involved here unless the company grows to IPO status.

Towson contends the main way to do business in these frontier markets is by going back to another era and network, press the flesh and be above board in your relationships. This is the way they do business over there. Don't be the Ugly American. As a member of the developed nations you are an outsider but have things to contribute like management skills, brand identity and technology. However, it's a hyper-competitive, fast and loose environment you are dealing with. That's why he looks for small, private companies that have a monopoly status in some exotic locale.

As far as the overall investing environment is concerned, the author thinks that since the end of World Wat II we have been primarily in a unipolar ecosystem, and, that as we move further into the future, we will be experiencing a multipolar financial world. East will clash with West and those from the developed nations that wish to make the most money, will have to put up with emerging market norms like crony capitalism. Political power is often concentrated with the privileged few in the developing world, and you must make inroads with the local governments if you wish to succeed.

I really liked this book. I thought it made me more informed on what is going on in cross-border finance. I think it would be an excellent tool for not only those that have the capability of doing large financial deals, but business students in general. A job well done.

Let Off The Leash

Almost every financial book I've read the past two years has suggested that we are in for rough sledding in regards to where the economy is heading for the next decade. Some of these publications were written by academics, but for the most part, they have been penned by investors with plenty of assets under management and a wealth of experience. If this were a self-fulfilling prophecy, I'd be in the chips by now with my short positions, but the market is a different animal than the economy. As is, I'm in the belly of the beast as the market surges ahead.

Since the beginning of the year I've been kicking the tires on some of the stocks I'd like to buy for my portfolio once the indexes get to more reasonable levels. Most of these equities are in the biotech, wireless, cloud computing and clean energy areas. You could buy blindly into these sectors with ETFs and probably still make some money in the short-term. These industries have gotten their true due from market participants since the March 2009 lows and equity prices have escalated because this is where the growth is. They've been a winning hand and rightfully so. American ingenuity has not gone away and will be here for the foreseeable future if companies like Apple (AAPL), Acme Packet (APKT) and Salesforce.com (CRM) have anything to do about it.

Most of the organizations I have analyzed of late have extremely high valuations for now, next year, and even into 2013. They are great companies, but with P/E Ratios over one hundred in some cases, I just won't go near them. Apple is the exception, but I contend they've reached the law of large numbers and are now ranked third in regards to market capitalization globally. I think that I'm making a reasonable assumption that we will get a pullback and that it may be significant. However, be warned, I've made this assumption for a year and a half with very little success except for the occasional mini correction. That's not going to get me in the Barron's Roundtable.

From doing all of the research for my postings, I am of the belief that we are at the threshold of a new era of growth in technology, specifically in cloud computing. Cloud computing and the buildout of the backbone of Internet 2.0 will encompass every industry and every person that uses a computer, laptop, smartphone or tablet. It touches consumers more so than the personal computer revolution did because the outset of PC adaption was basically a corporate phenomenon. The introduction of word processing and spreadsheet programs like Lotus 1-2-3 made the PC popular in the cubicles across the enterprise landscape. Made life much more easier. They don't cook the books anymore. It's all done with Quicken and Excel.

It took until the Internet was made accessible to the mainstream before your average Joe on the street became wired. A large percentage of the population now has some sort of device that accesses the World Wide Web. Because the cloud enables corporations to save money, it will be implemented and you will be assimilated or left behind. It's a whole new ballgame.

Not every cloud computing stock has gottten ahead of itself. F5 Networks (FFIV) just had a blowout quarter and I still believe they are reasonably valued, if not undervalued. I am still hesitant to add these shares to the Ithaca Experiment portfolio because when the market crashed in 2008-2009, all P/E Ratios contracted. I am banking on this scenario unfolding again to some extent in the next year or so. Maybe the market won't fall off of a cliff again, but it may grind slowly down.

To reiterate what I've stated in previous postings concerning the economy, I think that this era is more like the 1930's or 1970's, not the 1960's or 1990's. Technology has been on an upward trajectory since the early 1950's, but that doesn't always translate into higher stock prices, at least for the overall market. Some stocks will do well, and they already have the past two years. The issue is whether they will be able to hold their lofty valuations. I am banking that they will come back down to more reasonable metrics.

In the meantime, I will continue to evaluate securities I either find interesting, or that are popular and I don't understand their technology. After all, if my theory is right and we are in a new technology era, there will be things that I will want to know to stay ahead of the curve. I hope I can keep you informed, too.

VeriFone Systems: Your Cash Ain't Nothing But Trash

It seems like I see VeriFone Systems (PAY) products every time I use my credit card. Swipe your card at the gas pump, grocery store, restaurants (both casual dining and fast food), retail stores and even in taxis, you are probably using a VeriFone Systems point-of-purchase reader. Since its inception in 1981, the company has, "...designed and marketed system solutions that facilitate the long-term shift toward electronic payment transactions and away from cash and checks.", so says the 10-K. When you hear the expression 'your cash is no good here', VeriFone really means it. It's been a mission of the company to get the genral public to use only plasitc, either debit or credit cards, and has been very successful in their endeavor.

Their stock has experienced a caffeinated run since the early part of May 2010 when it was selling for $15.50. It's currently trading in the mid $50's after a series of blowout quarters. There is also the anticipation of their intermediary position between consumers and financial cartels with Near Field Communications (NFC) capabilities on smartphones, and, the profits they may reap as retailers upgrade their sytems. NFC is the nascent technology that allows you to make credit card payments with your handheld mobile device among other things. Just wave your cellphone near a point-of-purchase terminal and voila, your transaction is complete. No cash, no credit cards.

NFC has been center stage of late with the introduction of Isis, a joint venture of AT&T (T), T-Mobile and Verizon (VZ) that is developing the technology to not only accept payments via smartphones, but to also include value-added services like advertising and coupons. VeriFone CEO Douglas Bergeron articulated during the last conference call: "The Isis joint venture alone represents a market reach covering 76% of U.S. mobile phone subscribers and a distribution network of over 20,000 retail stores across America. When you add the Google (GOOG), Apple (AAPL) and PayPal brands and their prospective global reach, it becomes quite clear we are at a tipping point where mobile payments can begin to pay for goods and services.".

Last month The Wall Street Journal reported that Google, MasterCard (MA) and CitiGroup (C) were teaming up to embed NFC technology in Android devices, and, use VeriFone readers to process the payments in a pilot program. Neither Google or VeriFone will reap the rewards of transaction fees, but they will be able collect data from handset users and transmit the above mentioned advertisements and coupons to end users. CEO Bergeron declined to comment on VeriFone's relationship with Google in that same article, but in 4/12/11 Reuters post said: "The more complexity that moves to the point-of-sale, the better for us. A system that adds NFC capabilities is obviously higher margin than something that just swipes a credit card.".

Bergeron also stated that: "The typical refresh cycle for payment terminals is 3-4 years and if NFC succeeds, VeriFone would have the opportunity to speed up that cycle.". This compounds the dynamic that 40%-45% of all credit card transactions domestically are still performed by integrated cash register solutions. There is plenty of market share for VeriFone to grab as the world adapts to the 21st Century - in the America and overseas.

VeriFone Systems currently ranks: "... number 2 in the global market for payment systems. But it should take over the top spot when it closes its $485 million buyout of Hypercom, a maker of point-of-sale equipment...", as reported in a recent Investor's Business Daily article. This relationship between VeriFone and Hypercom is no shotgun wedding. In fact, in the two weeks since the article was published, Hypercom did their version of a prenup and sold its U.S. payment systems business to Ingenico S.A. (ING.PA) in order to clear the path for the merger to be approved. It is slated to close in the second half of 2011.

If you believe that the added muscle and reach of Hypercom, and the evolution of NFC technology may boost the top and bottom lines for VeriFone Systems, you may be right, but not immediately. The potential merger could put pressure on the stock as the two companies amalgamate their resources. Although The Yankee Group predicts the value of NFC-based transactions is likely to increase from $27 million in 2010 to $40 billion in 2014, there is no guarantee that retailers will adopt the technology as fast as The Yankee Group is forecasting unless service providers win over the merchants.

In the 3/1/11 conference call, CEO Bergeron addressed the issue: "These merchants won't willingly migrate to alternative payment schemes and value-added services unless they are seemingly compliant with traditional ways to pay at point-of-sale and don't add to the complexity and expense of payment acceptance. Service providers have continually tried to force feed new payment and security requirements on merchants, who have been telling us that frankly, they've had enough.".

On a valuation level VeriFone Systems is reasonably priced at $52/share. Its consensus earnings estimate for 2011 as reported on Yahoo Finance is $1.81, which gives it a P/E Ratio of 28. Going forward one year, earnings estimates are $2.17, which gives at a P/E of 24 and a growth rate of about 25%. So the PEG Ratio (price/earnings/growth) is roughly one - right about where you want it if you are considering this stock for your portfolio.

It should be noted that VeriFone Sytems has basically operated at a loss for most of their duration, although 2010 and 2011 were very profitable. One tidbit I dug up in the conference call courtesy of Mr. Bergeron concerned the lumpy growth the company has experienced in the past. When buttonholed by an analyst about the tough comps the company will surely experience going forward (they grew 43% over last year), Bergeron responded: "No, I don't think we'll see 43% year-over-year growth. But double digits, I think, a fairly low hurdle, and I'm pretty confident that that's in the cards for the foreseeable future.".

If you do own the stock, or, are thinking of buying it, be aware that it may be a roller coaster ride if you are a long-term investor. When looking at VeriFone Systems, you should also take into consideration it's primarily a hardware stock with a P/E Ratio of 28. Contrast that with Apple and their P/E Ratio of 15. They both have approximately the same growth rates.

Investors should also know that they were rocked by an accounting scandal in 2007-2008 and had to restate earnings which crushed the stock. This may change the complexion of your thinking, but it's what lies ahead that is important for them. Bergeron has been CEO since 2001, and, seems to have righted the ship after the CFO and General Counsel were let go in the aftermath of the bookkeeping chicanery.

There is a legitimate debate as to where the market is heading, if anywhere. I heard Ken Fisher on CNBC on Tuesday and he believes we are going to flatline this year. Then you get soothsayers like Harry Dent who are extremely bearish on the second half of the year, and conversely, the bulls like Jim Paulsen of Wells Capital Management who see no end in sight for the current run. Which direction this market goes will have a large impact on VeriFone systems because of their Beta of 1.98. If the market keeps rising, this equity will continue to outperform the S&P 500. However, if the market contracts, look out below. This stock could drop considerably.