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Monday, March 31, 2008 -- Subscribe free

Is Sweden Picking the Vodka Top?

I was very intrigued to see that Absolut has finally been sold, and it makes me wonder: is this the "top" for the premium, marketing-driven vodka market?

Now this is just a crazy theory, so feel free to ignore me.

But here's my rationale:

Everyone talks about the fact that Steve Schwarzman "picked the top" in the private equity business by taking Blackstone Group public last summer, at the best possible moment before the credit implosion ended the era of cheap money and easy leveraged buyouts.

(This brings up the painful memory that I am a Blackstone unitholder, though at a price far below the IPO, but that's neither here nor there).

Blackstone became a popular icon of the era of private equity and hedge funds, though they were of course far from being the only, or even the most important, players in that field. And Steve Schwarzman became the face of Wall Street excess for having a ridiculously Kozlowskian birthday party just months before Rome started burning.

Now here's where we stretch a bit ...

Vin and Spirits, the alcohol company owned by the Swedish government, ought to be the poster child for fancy vodka. Before they launched Absolut, way back when I was a pup, there was no real branding for vodka -- the only brand you might have known would be Smirnoff. Smirnoff that was a brand that might call to mind fur hats, or maybe James Bond and a sultry fur-clad Bond girl sipping hooch in a hot tub, but it wasn't really marketed the same way consumer products are actively marketed today. No one loved Smirnoff because of it's ads. If you were a vodka drinker, you might buy Smirnoff instead of your liquor store brand because you had more money and the quality was better, but you probably didn't identify with the brand.

Absolut changed alcohol marketing forever -- their ads, often created by celebrity artists like Keith Haring, were beloved pop culture totems, hung up on teenagers' walls around the world, and their distinct style was copied by fraternity T-Shirts around the country.

Absolut created the idea of the premium vodka brand, and they were probably way ahead of their time. Who would have thought that you could make a premium version of a liquor that is primarily known (or was) for being tasteless and odorless (though that's debatable). Remember, this was well before even bottled water became widely accepted. There were alcohol bottles that were kind of cool, I suppose, like the boxy green Tanqueray bottle or whatever novelty bourbon bottle had the most wax on the cork, but few really were iconic brands -- Absolut did for vodka what the strange basket bottle did for Chianti, it made it stand out and gave it an image.

So if you were over 20 at the time it was introduced you probably thought it was ridiculous to market a vodka like this. But the Swedes did it. And I have a theory.

They rode the wave of Absolut's success. But they grew wary.

They watched the massive outbreak of premium vodkas over the past five or ten years -- including flavored vodkas of nearly every stripe, another niche that Absolut pioneered and owned for years. And they started thinking, "hey, what do we do if everyone starts making this stuff and our market wears thin?"

Mind you, they were still (and are still) among the leading distilled spirit brands in the world, and certainly the leading vodka in the US market.

But then, the signs of a peak in the premium/luxury vodka market started to appear ... the fancy frosted bottles ... the crowding of the top shelf ... maybe Vin & Spirit got a little fidgety.

And then, the sure sign of the market top, Donald Trump got on board. I wonder whether an archivist, poring through the records of the Vin & Spirit company, will note that they first considered selling off the company back in 2005 when Drinks America (a tiny OTC stock that has been awful for investors) first announced the Trump Vodka line ... and finally accepted the Pernod Ricard bit for the business when Trump Vodka this year started actively shipping to Russia ... and started selling flavored versions.

(What the hell are the Russians doing importing vodka, anyway? That seems utterly ridiculous. But I digress.)

Just a hunch. Is Pernod Ricard really buying a premium brand and getting exposure to the important premium vodka segment? Or are they picking up a marketing-driven vodka just as it seems that the market can't for these products can't get any more ridiculous?

Pernod Ricard is probably making a smart move -- they say it will be accretive to earnings within a couple years, so I suppose they're probably not overpaying. And it's true that vodka was really the hole that they needed to fill if they were to take on Diageo in all of it's important segments around the world.

But I wonder whether Steve Schwarzman is sitting somewhere right now, sipping a glass of Trump Super Premium Vodka, and raising his glass to the Swedish government for selling off a prize asset just when it seemed that it's business couldn't get any better ...

full disclosure: I own Blackstone units but not any other investment mentioned here. And I like my liquor brown.

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nice post, funny stuff.

and makes good sense.

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The center-right parties that hold office in Sweden made a list of government assets that they planned to once elected and V & S was on that list. I understand that the decision to sell was ideological.

PS. It's Vin & Sprit, not Spirit.
Funny and irreverent. I love it. I'm currently addicted to another blog that casts a funny (but accurate) eye on current events - They didn't discuss the Absolute sale, but they do report on current economic goings-on in a humourous way.
Russia and Poland were on top of Vodka producers and consumers but this article is revealing facts that we would never expect.
Very great blog!Keep it goig.
Interesting article. Check out Fisher Investments MarketMinder for related stories on today's market.
Interesting look here but I think of more interest would be the publicly traded whiskey distileries
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Wednesday, March 19, 2008 -- Subscribe free

Is "Commodity" Going to be a bad word again?

Does anyone still remember when the one thing investors tried to avoid like the plague was a commodity investment?

OK, so I'm being a little bit facetious -- but it strikes me that with commodities taking a bit of a hit recently on fears of a recession (or something much worse, depending on who you talk to, and on whether or not you work at Bear Stearns), maybe we're going to have to look at what "commodity" really means.

What it used to mean for Wall Street was, "stay away." Does that ring a bell? We used to fear the commoditization of anything, particularly a company's products, because it meant that profit margin would inevitably fall.

So the great fear about Sandisk was that it's flash memory products would become a "commodity" instead of a branded product. That has kind of come true, though Sandisk is still developing proprietary stuff as well.

The fear was that the iPod might become a commodity if everyone developed great MP3 players. Didn't exactly work out that way, and Apple can charge whatever they want, apparently, and not lose market share.

But the DVD player did certainly become a commodity, sold for $20 at Wal Mart with very few people caring what brand the player carried. How long before Blu-Ray players become commodities? Probably a while, but the commoditization cycle seems to move faster and faster every year.

So what are we to make of the recent meteoric rise of commodities? What does the fear of commoditization mean for these companies?

Well, some of them are not really "commodities" anymore -- Potash has such a stranglehold on its fertilizer products, and there are so few other producers, that really what they're selling is no longer a commodity -- it's a proprietary fertilizer product that they can price accordingly, though certainly scarcity is a large part of the reason for their pricing power.

And Monsanto doesn't really sell a commodity product -- they have patented seeds and pesticides that help produce stronger, more efficient crops.

Is it important to be in companies in the commodity space that can provide a differentiated, special or unique product? Or do you just want to be in a company that processes a particular volume of whatever commodity it is, and takes the price offered by the market?

What's most important, perhaps, is that we consider that most commodities have no "backstop" -- there is nothing that matters except overall demand. The companies don't own proprietary processes, or patents, or in some cases any physical assets apart from the actual commodity product.

If you're talking about corn or wheat or copper, new investors in this space might note that the wheat run through Saskatchewan's Wheat Pool is no different to the global markets from the wheat sold by AWB out of Australia. Wheat producers don't have any differentiating products that allow them to hold up if demand falls off. Copper from Indonesia's mines is no different than copper from Canada or Nevada.

Personally, I do own some commodity producers and some related companies, but I like to remind myself that -- in contrast to many other companies I invest in or research -- many of them are "nothing special."

Perhaps if one is investing in many of these companies just to get exposure to the rapidly inflated market for various commodities around the world, one might just be better off buying the commodities themselves, either the futures, the physical stuff (for gold or silver, at least), or the ETFs that hold physical products and track futures instead of owning companies. The companies that produce and sell commodities have often been priced very cheaply because they produced a product that was high volume, usually low margin, and priced according to demand cycles that the producers couldn't control.

Maybe they will again become cheap someday for those same reasons, but those waiting for that cheap price might have to be very patient if the cycle takes a long time to swing. I certainly have a very hard time swallowing the high prices that you still have to pay for the DBA or MOO agribusiness ETFs, even though they certainly have every chance of riding the agriculture boom internationally for many years.

I'm just thinking with my fingers -- as you'll see from the disclosure below, these thoughts haven't necessarily guided many of my investment decisions just yet.

full disclosure: In the commodity space writ large I own shares of a grain distributor (ABB Grain), a gold miner (Centamin Egypt), a metals miner (Lynas), a meat packer (Sadia), and a timber REIT (RYN). I also own a small bit of physical gold and silver. I don't own any other investment mentioned here.

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I think that commodities are going to lose a lot of their recent price increases when the market recovers. many investors have moved out of stocks in oder to hedge against a falling market and falling dollar. However, when the market recovers, they will move back into stocks.

Check out my blog for articles about this:
i think commodites like nythin else have a cyclical period though unlike stocks there s no point in holding on to them, cos they are purely based on speculation and demand.the article has a good insight into "commodities" per say though!!
I do remember when being called a commodity was a death blow to a business. I think commodities are suffering because of the deflationary environment that we are facing. I expect that when the market recovers commodities will rise much higher. The demand will come back when the global economy rebounds.
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Tuesday, January 08, 2008 -- Subscribe free

Cancer Blaster vs. Surgical Robot?

The stock market is presenting all kinds of buying opportunities that are making me interested this week, but the one dynamic that stands out most today is the dramatic difference between the performance of two companies in my portfolio that sell high tech products that both do essentially the same thing ... though in very different ways.

Accuray (ARAY) is the maker of the Cyberknife, a targeted radiation machine for cancer treatments that has been called the "Cancer Blaster" by newsletter touts who enthusiastically recommend the stock. Though useful for all kinds of radiation treatments, the argument for this more advanced machine is that it can track moving tumors and spare nearby tissue -- making it particularly popular for prostate and lung cancers (since the lungs, you know, move, and the prostate is in, shall we say, a very delicate area of the body).

Intuitive Surgical (ISRG) is the maker of the da Vinci surgical robot, whose core market is prostate surgery (though other surgeries, including mitral valve heart surgery and gynecological applications, are growing fast). The strongest rationale for fast growth in the use of this robot a couple years ago was that prostate surgery with the da Vinci spared those same "delicate areas" near the prostate in a way that open surgery often did not ... though it certainly also has other advantages over open surgery, and, depending on the surgeon (and who you ask) over traditional laparoscopic surgery.

Accuray is up close to 10% today, Intuitive Surgical is down about 8% as of my last check. Why is that?

Well, it's certainly true that ISRG is much more steeply valued, being one of the top performers on the Nasdaq for all of last year, and there are huge numbers of shareholders, myself included, who have a cost basis several hundred percent below the current price -- that makes these shares a target for profit taking when shareholders start to panic that we're entering a recession and/or a prolonged bear market. Even the most enthusiastic shareholder would have a hard time arguing that ISRG is a bargain, even down $70 from its high, with a forward PE of about 60.

And Accuray is, on the face of it, much cheaper -- this much newer public company (IPOd over the summer last year) has much lighter penetration in the marketplace, and has some competitors who offer somewhat similar products (as opposed to the da Vinci, which has the multipurpose surgical robot space more or less to itself). And it trades at a forward PE of about 20, though there's no track record to encourage investors to believe that those analyst estimates are anywhere near accurate (earnings have fluctuated widely, as has the stock for its brief history).

ISRG got a downgrade today from Wachovia, which noted that hospital capital spending might be at some risk this year and that expectations for this highflier are quite optimistic. That's probably the most immediate reason for the price cut today, though general analyst concern and valuation jitters are probably the reason for the overall price cut from the high of $350 back in December to today's price around $280. ISRG still depends on sales of new systems for much of its revenue, though their recurring revenues from parts and services are growing faster and will be the future engine of the company -- so if they have a bad quarter and sell fewer systems than predicted, it would not be at all surprising if the shares fell dramatically, it has happened several times before.

And I'm not sure about any specific impetus for the ARAY move, though I do know that at least one newsletter is still actively pushing it, and the CEO did speak at the big JP Morgan conference in LA this morning (that conference has been moving stocks right and left, as usual, so that's probably the main move -- I haven't been watching, but perhaps they got a mention on CNBC). Add to that the general urge of investors to move to healthcare as a defensive move, and I guess ARAY is riding the trend.

I'm holding shares in both of these companies because companies that fight cancer will be facing a huge secular tailwind with the aging population over the next thirty years, and devices that are more advanced are popular with hospitals even when they cost millions of dollars -- I've seen the da Vinci advertised by hospitals for years by proud owner hospitals, which has clearly pressured their competitors to pick up the robot, too, and more recently I'm also seeing some ads for the Cyberknife from hospitals around the country. At this stage in their growth, with a more expensive machine that is in many fewer hospitals, I presume that Accuray is likely to get more of a boost from the fact that the Cyberknife still truly gives hospitals a dramatic competitive advantage in drawing oncologists and cancer patients.

So I still like both firms -- ISRG seems to me to be the company with a more dominant presence, though they don't compete directly, and they have a much steadier potential earnings stream due to the importance of "disposable" attachments and accessories for the da Vinci that must be replaced frequently, and they're priced accordingly. ARAY seems to me to have a higher growth potential because, if the value of the Cyberknife continues to be borne out through more studies, they have a huge green field of hospitals who will need to buy it -- but they're cheaper because they have more direct competition, they're newer, and the rely almost entirely on device revenue and have far less hope of a strong recurring income stream from accessories and attachments (though there is some).

Indeed, the newsletter touts talk about ARAY as the "next ISRG," and in some ways that argument is compelling -- ARAY is, by some measures, where ISRG was a few years ago. Whether it will ever get to where ISRG is today is another matter, but I've got a bet in place that both will do very well over the coming decade.

full disclosure: In case it's not obvious, I do own shares of both ARAY and ISRG and do not intend to trade in either in the next week.

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Concerning the Wachovia comment about Hospital Capital being at Risk. I believe most hospital are funded by Public monies or Non profit entities, not by banks or investment firms.
With both of these firms, you want to keep a close eye on expectations regarding the upcoming US presidential election. Particularly, watch the prominence that health care reform is given by the democratic nominee, along with his or her standing in the polls.

If it health care is a major issue and the candidate promising dramatic reform (presumably the democrat) appears the likely winner, it may well cause hospitals to cut back on large capital equipment due to uncertainty over their ability to charge high fees for its use. I saw a similar dynamic while working for a large maker of high-end medical scanners (CAT, MRI, etc.) in 1993, when the Clinton health care reform package was being debated.

Given the expectations that are baked into ISRG's price in particular, it's likely that the market would punish it's stock severely in such an event.
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Thursday, November 29, 2007 -- Subscribe free

Eddie Lampert ... just like me?

I don't want to pile on the Sears Holdings boo-fest that's happening across all financial media this morning -- but I thought I'd share a few thoughts I had about Eddie Lampert and what I think are some mistakes he might have made ... mistakes that are certainly similar to the kinds of things individual investors, myself included, do to sabotage themselves every day.

What we have seen from Sears Holdings (SHLD), Eddie Lampert's primary holding and the stock that was supposed to be his investment vehicle as he built a Warren Buffett-like empire, has been nothing short of dismal. The shares are now about 50% below the high that they hit back in May, primarily because the actual Sears and Kmart stores are doing terribly -- weak sales, weak earnings, and, frankly, stores that no one could be excited about visiting.

But you've already heard that from pundits across the globe today already -- what I was thinking about was how Eddie Lampert's experience can illuminate some of the problems that individual investors often have, problems deeply rooted in our psychology.

There are two things that I think have been significant about the Sears Holdings story since Eddie Lampert got on board. Certainly, he almost immediately increased the value of the company dramatically by harvesting the value of the real estate below the Sears and Kmart stores, and no one can take that away from him.

But in terms of operating the company, beyond that first burst of value creation, there are two things that I think are significant.

The first, is that Eddie Lampert didn't just buy Sears because he thought it had undervalued real estate, harvest that value, and move on. He thought he could turn around the company itself.

That, to me, is a bit of a warning sign. It strikes me that this is the same kind of problem that individual investors often have, they assume that their skills and expertise in one area mean that they are naturally going to be skilled and expert investors.

What do I mean? Well, Eddie Lampert is, even given this current problem at Sears, clearly a brilliant value investor. He knows how to identify bargains, he knows how to use financial engineering of all sorts to harvest value, he knows how to get great returns on the public and private markets.

Does that mean he's a guy who can turn around a struggling retail giant? That's very much still an open question.

I've made similar kinds of mistakes more than once myself -- often times after I have an experience that I think validates my investing acumen, I have come across tiny stocks that seem brilliantly positioned, in areas where I have just enough knowledge to get myself in trouble, and I've invested in them. Often, it hasn't worked out, but I find myself buying those shares -- to psychoanalyze myself just a little -- because I get puffed up by a successful trade or investment and think, "I'm brilliant! If I like this new stock it must be great!"

I'm not saying that Eddie Lampert is nearly as swayed by emotion as the typical investor, or that he's as much of an idiot as I've proven to be at times ... but it continues to look to me like his belief that he could bring any kind of operating savvy to Sears, and manage the stores in a different way without worrying about standard metrics like same store sales growth, might have been a bit of hubris. He's a brilliant guy, by all accounts a strong-willed guy who has been able to bend many situations to his will -- he negotiated his own release from kidnappers, for crying out loud -- but that doesn't necessarily mean that his ideas for managing a retail dinosaur are going to work.

This psychological problem in individual investors has generally been described as "overconfidence" -- it's possible that other issues are coming into play for Eddie Lampert as well, like "cognitive dissonance," which as I think of it is the inability to process conflicting information -- in this case, his close relationship with Sears, his heavy investment in the company and it's future, and the confidence that he has the right plan makes him unable to see the skeletons of Montgomery Ward, Jamesway or Ames and realize how difficult (I'd say "doomed") his challenge is, especially with a weakening consumer market.

The other significant psychological barrier that Lampert seems to me to be running into, and again it's one that's quite common for me, is simple obstinacy. This is related a bit to cognitive dissonance, in that you want to stay on the same track with what you feel should be working, and you ignore warning signs that you're going the wrong way.

In my case, this would be akin doubling down on falling stocks because I still keep in my head the original conviction I had that they would be excellent investments -- one example of this is Chico's (CHS), I bought shares ages ago, at much higher prices, and averaged down a few times because I believed that the problems they were having were temporary. If so, they were "long term" temporary and they continue to worsen -- so in my case, I built an image of Chico's in my mind that said it was a strong grower for the long term ... and even though that growth case started breaking down, with plenty of evidence for that breakdown coming out every quarter, or sometimes every month, I kept putting more in. Ooops. Now I'm stuck with the evidence of my mistake in my portfolio every day.

When we talk about Sears and Eddie Lampert, I wonder whether something similar is coming into play, particularly with his aggressive share buybacks --all of which, in the past year, have clearly now been very badly timed. While Sears has been doing badly by all traditional metrics, it has been generating some very good cash flow ... and one of the things that Lampert was supposed to bring to the table was an ability to reinvest that cash flow into much better growth opportunities. That's what made his running Sears a great idea, his ability to allocate cash flow for better long term results.

And that's what made people say that he would be the "next Warren Buffett" or that Sears Holdings would be the "next Berkshire Hathaway." Looking back on his history, it's clear that Warren is an excellent allocator of capital and a great investor, but there isn't much evidence that he is great at running a textile mill (which is what Berkshire was when he bought it). His brilliance was not his ability to turn around a dinosaur in a dying industry, it was to (eventually) realize that the textile business was dying, harvest as much cash from it as he could, and move that money into something much more valuable -- in his case, insurance companies.

And this is where I really have a problem with Sears and the current Eddie Lampert plan, at least as I interpret it. While their recent offer to buy Restoration Hardware is intriguing, the fact remains that, so far, all of Sears' excess cash has been reinvested in Sears shares through very aggressive stock buybacks. And that investment by Lampert has been a massive money loser over the past year as Sears shares have crumbled.

So, does he really have a plan to really harvest the value of Sears, or is he continuing obstinately to believe that he can restore it to it's former glory as the leading retailer in the country? Or is it something in between? I'd be happy to hire him to chop up a dying firm and get the most money possible from it, but I'd be very reluctant to hire him to turn around a complex operating business -- even experts in the retail turnaround field, like Julian Day (who incidentally made his reputation at Kmart, now a part of Sears Holdings) don't necessarily find fast or certain success in doing this every time, and in Day's case the jury is still out on Radio Shack after about a year and a half of his turnaround leadership.

I find it refreshing that Eddie Lampert seems, at least on the surface, to face some of the same psychological barriers as I do in investing -- and I hope that I can think of the plight of Sears the next time I'm talking myself into doing something foolish in a situation that I don't fully understand.

Just to close this out on a friendlier note, it is very possible that the Eddie Lampert brilliance is poised inside the moldering shell of Sears, just waiting to pounce out. I don't know what their plans are, or how they will do in the future -- and I do understand that as a long term investor in a very short term world there are going to be times that Lampert looks foolish and takes unwarranted criticism, just as Warren Buffett has on many times when he's at least temporarily on the wrong side of a trend (as with his USG purchases most recently). I might be guilty of that here.

Value investors and contrarians are often portrayed as foolish by the investing punditocracy because of the short term movements of their portfolio as they try to envision a success that may be five or ten years away, so what look like mistakes might appear better in the future. For the sake of the investors who put their faith in Eddie Lampert to built the next great value investing empire, I certainly hope that's the case here.

full disclosure: I do own shares of CHS as of this writing (unfortunately), but not of any other stock mentioned.


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Thanks for the "...just like me?" blog on Eddie Lampert. It's satisfying to read your balanced, insightful, rational views. Outstanding work!
Warren's success was getting the consistent cash flow from a (well run, now) insurance business, people pay their premiums every month, and that can't be underestimated.
People don't have to shop @ Sears or KMart every month spending the same amount each and each time.
I think quality of cash flow is something Eddie should have looked at ! Maybe he should've followed Warren Buffett's lead and bought an insurance company instead.
Thanks for this discussion. I've been a victim of my own convictions more than once. This will help me analyze and learn from my mistakes. Thank you.
Karl Miller is the founder of MMC Energy, Inc (Nasdaq: MMCE)and has been the strategic driver of the Company.

He is a large "paid in" owner and
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Miller is close to Stephens Investment Management and
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