• 004 05/11/2014

    In a management presentation not too long ago I was made aware of an investment theme completely unknown to me previously: ballast water treatment. Ballast water is used by shipping vessels, such as bulk carriers or tankers, to maintain stability in transit. Larger ships can carry millions of gallons of water in their ballast tanks, which is brought on board and discharged between ports as needed. Coincidentally, a colleague of mine recently e-mailed me a copy of Janney Capital Markets Infrastructure Quarterly Newsletter, which had some data on the subject I thought was worth sharing:

    Global regulatory authorities such as the International Maritime Organization (“IMO”) and individual countries such as the United States have set standards to mandate that ships’ ballast water be treated to eliminate the spread of invasive aquatic species. On a worldwide basis, this is expected to impact both newly built ships (~1,500 per year) and the installed base of existing ships. One of the largest segments of the existing ship market comprises solutions for large bulk carriers and tankers, which must treat extremely high volumes of ballast water (1,500 to over 6,000 cubic meters per hour). Today, there are approximately 50,000 vessels with ballast tanks in excess of 1,500 cubic meters.

    In anticipation of this emerging world market, a variety of analysts have developed studies to clarify the opportunity. One of the most comprehensive was recently issued by a prominent market research firm which has estimated that ship owners will spend over $40 billion between 2013 and 2023 to comply with emerging regulations on discharging ballast water.

    The report referenced in the article, suggests that "Annual BWT Equipment Spend" will grow at a rate of 21% from 2013 - 2023. 

    On the flight back from the management presentation, I read an article in Barron's outlining a different theme (water scarcity), and found one quote in the article particularly relevant to the topic of theme investing:

    “ The problem with theme investing, however, is that some key factors that drive stock returns have nothing to do with the themes. Chief among these is valuation; the price an investor pays is easily as important to long-term returns as what he buys. The S&P Global Water index recently traded at 23 times trailing earnings, versus 18 times for the S&P 500. Investors with a thirst for water exposure must be careful not to pay too much.”

    I wanted to couple these two passages because I am consistently surprised by the variety of niche industries revealed in the quest to uncover value. It is truly fascinating to me. And once an attractive sector has been identified, one of the greatest challenges for an investor is to wait patiently for the right buying opportunity. As the legendary investor Joel Greenblatt puts it, "This is one of the hardest things to master for professional investors: coming in each day for work and doing nothing."



  • 003 05/09/2014

    I had an opportunity to meet with J. Hilburn co-founder Hil Davis in December of 2013. In my efforts to do a little research prior to the meeting I stumbled across an article in Inc. Magazine. I like stories that expose the catalyst for a new venture:

    In a story that's now enshrined in the company mythology, Hil Davis was reading The Warren Buffett Way on a plane about six years ago when he came upon a passage in which the legendary investor said that his best investment ever, dollar for dollar, was not Coca-Cola or American Express or Geico but the direct-sales kitchen-equipment company The Pampered Chef. In fact, Davis learned, Buffett owns several other direct-sales companies, under the umbrella group Scott Fetzer Companies.

    "My first thought was, That makes no sense. Direct sales? That's a dirty word," Davis remembers. But Buffett was his hero, and Davis found himself preoccupied with figuring out what he had missed about the model. Davis, who talks in a high-speed mashup of business jargon and good-ol'-boy charm, was 33 at the time and working in investment banking as an equity researcher, a job that paid him the very handsome salary of $1.4 million. "I loved equity research," he says. "I loved the chess game, the math behind it." Partly, his deciding to examine direct sales in depth was just a way to channel his excess business geekery. It was a puzzle that demanded solving. But he was also restless.

    Five years later, J.Hilburn is the single largest seller of men's custom dress shirts in the world. Shirts start at $89, and they're made from the same fabric as shirts from the Zegnas and Armanis of the world. Last year, Esquire named J.Hilburn the best custom shirtmaker. Since the company officially launched in 2007, it has expanded from dress shirts to custom men's suiting; ready-to-wear casual clothes; belts, ties, cufflinks, and other accessories; outerwear; and now formalwear.

    For the full article (and description of how he solved the “puzzle”) please visit the LINK.


  • 002 05/09/2014

    The Financial Page of the New Yorker recently featured a new hepititis-C drug developed by Gilead. The new drug can cure 90% of patients in three to six months. 

    “There’s just one catch: a single dose of the drug costs a thousand dollars, which means that a full, twelve-week course of treatment comes to more than eighty grand.”

    The article also states that that hep-C patients have an average annual income of just twenty-three thousand dollars - a disturbing discrepancy. What I like most about the article is how it concisely explains the economics that bridge this gap, and the pricing power pharmaceutical manufacturers have:  

    Investors love drug companies in part because they often have tremendous pricing power. Drugs designed to fight rare diseases routinely cost two or three hundred thousand dollars; cancer drugs often cost a hundred grand. And, whereas product prices in most industries drop over time, pharmaceuticals actually get more expensive. The price of the anti-leukemia drug Gleevec, for instance, has tripled since 2001. And, across the board, drug prices rise much faster than inflation. The reason for this is that prices for brand-name, patented drugs aren’t really set in a free market. The people taking the drugs aren’t paying most of the cost, which makes them less price-sensitive, and the bargaining power of those who do foot the bill is limited. Insurers have to cover drugs that work well; the economists Darius Lakdawalla and Wesley Yin recently found that even big insurers had “virtually zero” ability to drive a hard bargain when it comes to drugs with no real equivalents. And the biggest buyer in the drug market—the federal government—is prohibited from bargaining for lower prices for Medicare, and from refusing to pay for drugs on the basis of cost. In short, if you invent a drug that doctors think is necessary, you have enormous leeway to charge what you will.

    For the full article follow the LINK or click on the image of the magazine to the right. 



Models are:
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above



*Answers a, b, c, d, e, f and g are all correct.