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Musings on Markets's Blog

How much diversification is too much?

December 7, 2011 Comments (0)

As an investor, should you put allof your money in one stock or should you spread your bets across manyinvestments? If it is the latter, how many investments should you have in yourportfolio? The debate is an old one and there are many views but they fallbetween two extremes. At one end is the advice that you get from a believer inefficient markets: be maximally diversfied, across asset classes, and withineach asset class, across as many assets you can hold: the proverbial “marketportfolio”...

Following up on Groupon

November 4, 2011 Comments (0)

In my last post, I made an attempt to value Groupon and came up with $14.62/share, before the voting rightadjustment. Now that the offering is complete and the first day of trading isover, I thought it would be useful to take stock of general lessons that can bedrawn from this deal. The offering price was raised to $20/share and the stock jumped another 40% during the course of the day. So, here are a few questions that I am fielding today... 1.     Is it possible...

Are you ready to value Groupon?

November 2, 2011 Comments (0)

After a series of missteps, it looks like the Groupon valuation is ready to hit the market on Friday, with the final pricing to be done on Thursday. To bring you up to date on thisunfolding story, the initial talk during the summer was that the company wouldbe valued at $20 billion or more. In the months afterwards, loose talk from management of how customer acquisition costs were not operating expenses and what should be recorded asrevenues got in the way of the sales pitch. As management...

Growth (Part 4): Growth and Management Credibility

October 28, 2011 Comments (0)

If you buy a growth company, the bulk of the value that you attach to the company comes from its growth assets. For these growth assets to be valuable, though, not only do you need high growth potential, but the company has to be able to scale up its growth while ensuring that it generates returns that exceed its cost of capital, while delivering this growth. That is tough to do, and it should come as no surprise that most young, growth companies do not make it through these...

Growth (Part 3): The Value of Growth

October 27, 2011 Comments (0)

Consider a firm that has $ 100 million invested in capital that generated $ 10 million in after-tax income in the most recent year. For this firm to generate more income next year, it has to do one of two things: Manage its existing capital (assets) more efficiently: Thus, if the firm can cut its operating expenses and increase its income to $12 million next period, it will have a growth rate of 20% for the next period. Let's call this efficiency growth.Add to its capital base: If the firm...

Growth (Part 2): Scaling up Growth

October 26, 2011 Comments (0)

As companies get larger, it becomes more difficult to sustain high percentage growth rates in revenues for two reasons. The first is that the same percentage growth rate will require larger and larger absolute changes in revenues each period and thus will be more difficult to deliver. The second is that a company's success  will attract the attention of other firms; the resulting competition will act as a damper on growth. I know! I know! You have your counter examples ready: Apple and...

Growth (Part 1): The Limits of Growth

October 26, 2011 Comments (0)

When valuing young, growth companies, a key input into the valuation is the expected growth rate in revenues. For these companies to become valuable, small revenues have to become big revenues (and negative operating margins have to become positive ones...) and revenue growth is the driver of value. It is a tough number to estimate and it is easy to get carried away, especially in hot sectors. In this post, I will look at the information that can be used to put limits on this estimate,...

Growth and Value: Thoughts on Google, Groupon and Green Mountain

October 18, 2011 Comments (0)

In the last week, I noticed three stories that at firstsight seem to be unrelated but I think share a common theme: The first was on Google, with the focus being onhow much Google is spending to impressive growth numbers.The second and continuing story is on Groupon and it’s imminent or not so imminent IPO, with the emphasis being on theaccounting shenanigans and market whiplash.The third story is on Green Mountain Coffee, anincredible success story over the last five years, and the...

Risk free rates and value: Dealing with historically low risk free rates

September 30, 2011 Comments (0)

Last week, the 10-year US treasury bond rate dropped to 1.75%. While it has risen since to about 2%, there can be no denying a  basic fact. Government bond rates have dropped in almost all of the developed market currencies: the Euro, the British Pound, the Swiss Franc and the Yen. Since government bond rates are used as risk free rates to estimate discount rates in valuation or hurdle rates in corporate finance, there has been a great deal of hand wringing and angst among valuation...

Ruminations on Rogue Trading

September 23, 2011 Comments (0)

We are in the midst of a "rogue trading" scandal and the media loves it. It started with this report in the Wall Street Journal about an unnamed trader who had lost $ 2 billion for the Swiss banking giant, UBS. The trader was quickly identified and named as Kewku Abdoli, a director at the UBS Delta One desk (more on that later). Today's story has more details, with a comment from Abdoli's lawyer about how much he regrets his actions (or at least getting caught). If you have a sense of deja...