Doro looks cheap

“What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.”

David Einhorn

As a follow up to my blog post on 'Swedish Value and Glamour Stocks' I have now updated my list to also include EV/EBITDA in addition to P/E, P/S, P/B and dividend yield. The addition of this ratio to the composite does not change things so much, however the top 5 is shown below.

Although this type of investment strategy is usually applied by buying a diversified portfolio of the cheapest stocks, and not stock picking, I wanted to focus a little bit on Doro as it has now floated to the top of the list and I would say feels the most difficult to invest in of the five* (curiously the stock is up about 7% these past two days so the above figures are out by a bit).

Doro is a Swedish based company that develops and sells telecommunications products and software that is designed for the senior market. Products include mobile phones, cordless and corded phones, remote controls, alarm clocks and headsets.

I'm sure everyone must know an elderly relative who struggles to understand and use modern telephones, so I'm sure there is a market out there for simplified technology. However, one does wonder where the sustainable business model is, can't they just download an app onto a smart phone that simplifies the user software and shows big letters/numbers?

Anyhow, below is Doro's share price from the past two years, it has pretty much done a round trip from 25sek, up to 57sek and then back again to 30sek!

So what has happened the past year? Well the company has lost a lot if its growth from 2013, with lower sales, margins and weak cash flow (link analysis in Swedish) A company doesn't become cheap without good reasons!

So we know the latest financials are weak and have fallen below expectations, however it might be interesting at this point to (attempt to!) apply some Howard Marks' style of second level thinking (youtube and here) on Doro.

First level: Doro's fundamentals and growth have deteriorated; sell the stock.

Second level: Doro's fundamentals and growth have deteriorated, however the market has priced in too much bad news so the price has fallen too far compared to its fundamentals; buy the stock.

There is no magic or investment edge in the valuations shown in the table, the market sees the number too. Perhaps this is falling knife and we are far from the bottom.

However, what we do know is Mr Market is only prepared to pay this much for Doro's business and at the moment it's relatively little. Such stocks have a habit of surprising investors on the upside.

Apple: My Big Miss of 2013

“Forgetting your mistakes is a terrible error if you are trying to improve your cognition. Reality doesn’t remind you. Why not celebrate stupidities in both categories?” 

Charlie Munger

I'm sure Apple need no introduction, below is its stock chart from the past 2 years.

We can see the share price peak in Oct 2012 at just over $95 per share where Apple could do no wrong and was very popular with investors, attracting momentum traders. And why not, it had made people a lot of money and everyone liked their products.

Just six month later however, the share price had fallen 40% and found itself at $55 with worries of falling growth, shrinking margins and competition from the like of Samsung. Things would never be the same and Apples time had past. How quickly perceptions can change!

Those of you who follow Aswath Damodaran and read his blog Musings on Markets will know that he is a fan of Apple as a company and has regularity posted updates on his valuation of the company. He uses 'free cash flow to the firm' and discounts it to a present value to get a valuation of the stock.

In February 2013 with the share price at $440 ($63 at todays prices after 7:1 split) he wrote the following entry 'Back to Apple: Thoughts on value, proce and the confidence gap', discussing how, if at all, the share price would close the 38% to his valuation of $608.

What caught my attention was the following statement

"Thus, for Apple to be worth only $440 (or less), you would need negative or close to zero revenue growth, pre-tax operating margins of 25%(current margin is closer to 35%, down from 40% plus a year ago) and the cost of capital would have to be at 15% (the 97th percentile of US stocks)."

This was very interesting as it was a reverse-DCF calculation, determining what the assumptions must be to get the current share price. This for me rang a bell, the market was pricing in a very poor future scenario for Apple of no growth and higher risks. The downside risks had been considerably reduced and there seemed to be a margin of safety.

However, I still couldn't and didn't buy Apple shares......here is why, in no particular order.

1. I believed Apples future revenues would shrink because of competition.
2. I believed Apple would struggle to maintain its innovative competitive edge.
3. I felt uncomfortable in investing my own money.
4. The stock price had gone so high, I felt it had more to fall (although this turned out to be true!).
5. I was probably affected by the negative press.
6. I felt Apple's time as king of the hill was over.
7. Although it had low a valuation, e.g. P/E, I thought those earning were fragile and could easily erode away.
8. I don't like relying on someone else's analysis and conclusions for an investment.
9.The more it fell, the more I wanted to get it even cheaper yet wanted to somehow time the bottom tick.

Going back to the chart, the share price actually fell another 14% after reading that blog post, touching $54 twice before regaining ground and is now up 70% from those lows. Despite this big move Apple can still considered to be cheap based on earnings, free cash flow and shareholder yield.

Despite this, I still cannot pull the buy trigger (I blame anchoring bias!) and so continues my relationship with Apple.