Friday, December 18, 2009

Free Advice

Every quarter, public companies are required to release their latest financial results. Along with their results, they hold conference calls and accept questions from the public. As we've discussed before, it's important for investors to listen to these calls to understand the challenges the company faces. Usually, analysts ask management about revenue outlooks for various products, margin expectations, overall strategy and other pertinent questions. Sometimes, however, analysts will feel the need to offer some "free" advice to management.

On a conference call for Build-A-Bear (BBW) last year when the stock price was near its lowest, here's what Mike Smith of Kansas City Capital had to say when prompted for his question:

"Well, one comment first before I ask a question. I would suggest you don’t buy any stock back because [insert fearful outlook here]"

His opinion is one which was rampant throughout a finance industry that was gripped with fear. At a time when value investors were buying, stock analysts were against buying back shares at the cheapest prices in over a decade. (Of course, the value of analysts is not so clear when you consider their ratings of Lehman Brothers the day before it went down).

Of course, when valuations are already high is when companies tend to buy back their stock, with wholehearted support from analysts. Consider the magnitude of the buybacks that took place a couple of years ago when the market was at its peak. Needless to say, it was not the best use of shareholder capital.

I don't necessarily know that BBW should have been buying back stock at that particular point in time, but that option should most certainly not be automatically discarded; if management sees a certain level of cash flow that more than covers the company's fixed obligations, buybacks at cheap prices may very well be in order, particularly for a company with a lot of cash on hand. Here's what BBW's founder, chairman and CEO had to say on the matter:

"We have to look at it week by week and we do. And I think that if there’s opportunities that present themselves because we can see that the cash is in excess of what we thought would need to operate our business in a normal basis. And we’re also trying to look and forecast into 2009 and how the economic issues will affect us there."

Free advice is worth its price!


Rayhaan said...

Yo saj and barel(i ve finally figured out that u r 2 ppl, talk bout low brainpower!), i hope im not crossing lines here(yet again!) but u never tell us ur side of the story, i mean how did u guys become interested in taking up investing as a career? And what made u choose this particular 'religion' of investing as opposed to say growth? (pls answer these qs separately if possible) and would it be a good idea to review useful stuff from phil fishers books?( ur choice just asking) p.s keep up d gud work guys!

Saj Karsan said...

Hi Rayhaan,

I was always interested in investing, and when I learned about value investing it just made sense and was a natural fit. I decided to make a career out of it when I was enrolled in an MBA program.

I agree, reviewing Fisher would be good. Coincidentally, summaries of his book will come out on this site next week!

Rayhaan said...

Thx saj, u r d best! But hey u didnt tell bout barel n at wot age did u start learning bout investing?

Saj Karsan said...

Hi Rayhaan,

I can't really speak for Barel, and he hasn't been on the blog for a while. I can't remember when I first became interested in investing...probably as a teenager!

rayhaan said...

oh boy! we do ve a few things in common
now i guess im not the only contrarian freak around lol!
thx 4 answering my questions.
ps there r stocks with low d/e levels as well as p/e levels of less than 2!!!!!!
pls check out indian stock market