Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Tuesday, 28 October 2014

6 Things Yahoo! needs to do

Yahoo! has rose by almost 15% from its bottom of $37.82 on 15 Oct 2014. In its Q3 earnings, management has said that it will continue to invest in its mobile growth strategy and buybacks. Although this is good news, especially we do see growth in mobile materializing, the capital structure of the company in my view still have room for improvements.

1) The optimal size for Yahoo! is $10 billion or less currently in market cap. With $480 million in 2013 operation income, Yahoo! should be worth between a range of 10x - 20x P/E, valuing its core at $4.8 - $9.6 billion. Yahoo! should not own more cash than what its earnings are fundamentally worth.

2) A company worth $5 billion in market cap based on core operating income should not be given management of more than $35 billion in cash & near cash assets. Excess money should be return to shareholders to ensure management does not make bad decisions because it has a huge cash pile. It is also technically tough for management to utilize the cash and grow the core business to be worth at least 7 times its original size.

3) Yahoo! can continue to act as both an operating company and as a VC company, but it has to return most of its VC investment return more efficiently to shareholders while continuing to grow its core operating business.

4) While buybacks are good for the company's long-term shareholders, Yahoo!'s buyback reduces asset per share of the company, which reduce its price per share because Yahoo! is valued by its asset.

Yahoo! currently has a market capitalization of $43 billion, roughly $8 billion above its post-tax value of $35 billion, meaning that investors believe that management might be able to help save $8 billion of tax expense from its sale of its Asia assets (or its core is worth some money).

With $12billion in cash, if Yahoo! spends it to buyback it shares when its market cap is $40 billion, it would be able to purchase back 30% of its shares. Subsequently, it will have a net asset value of $23 billion + $5 billion value in its core business. The $8 billion in tax savings would put Yahoo!'s market cap at $35 billion, and with 700million shares outstanding, each share will be worth $50.

However, if Yahoo! perform a buyback when market cap is at $40 billion, it will only be able to buy back 26.7% of its shares, leaving a 733million shares outstanding. At $35 billion market cap, each share will be worth $47.75. A difference of $2.25 per share, which at current $43 price accounts to nearly 5% difference in potential returns.

I am not saying Yahoo! is overpriced. I am only saying that it is overvalued for a buyback, but it is reasonably priced.

5) 1% ownership of a failing business and 10% ownership of a failing business doesn't make a difference, the business is still failing. Yahoo! is undergoing a restructuring period and while the management may be doing a great job trying to turn around the company, it is still a 50-50 bet. With reference to point 2, the safer bet for Yahoo! would be to return the capital to shareholders so that we don't own what could be a fail turnaround. IBM is a great example of a most recent buyback failure.

6) They failed to maximise the tax benefits for shareholders in the previous 2 sell-off of Alibaba shares (one during 2012 and one during Alibaba IPO). Management failed in 2 times in situations where shareholder value could be protected, thus it is not very clear if the same management team would be able to effectively protect shareholders from the huge tax bill from Yahoo!'s Alibaba sale.

I am a shareholder of Yahoo!, I am writing this article to show my view regarding Yahoo!'s capital return program. I am also not receiving compensation from the above company or any other company. Above are just my 2 cents view of the company's valuation and are by no means any form of recommendation to purchase the stock.

Friday, 24 October 2014

Buyback is the Wrong Strategy for Yahoo!

During Yahoo!'s Q3 earnings call, we have seen both its CEO and CFO continuing to emphasize that buying back shares of Yahoo! is the right strategy to return capital to shareholders over the long-term.

However, in my view, this is a risky strategy pursued by the company in returning capital to its shareholders. As such, I am more on the side of pushing for Starboard's activist action in Yahoo!.

I laid below some mathematical calculation why Yahoo!'s buyback is a bad strategy:

Yahoo! retains 384 million shares of Alibaba, I value each share at $90, representing $34.56 billion pre-tax and $22.46 billion post-tax of value.

Yahoo! retains 35% of Yahoo! Japan that is valued at close to $7.8 billion pre-tax and $5 billion post-tax.

Yahoo! has cash of $12 billion as of end of Q3, with $3.3 billion of tax liabilities due 2015. Net cash position is $8.7 billion

Yahoo! also has a long-term liability (excluding taxes) of near $1.3 billion.

Net asset value of the company pre-tax is $53.2 billion and post-tax of $35.1 billion.

Share buybacks are only effective when shares are bought when they are undervalued and when the core business is a good business.

Assuming Yahoo! has 1 billion shares outstanding (for easier tabulation).
Yahoo! is a sum-of-parts investment, where its share price is currently the value of its assets - Pre-tax of $53 billion or Post-tax of $35 billion.

Conservatively, assuming that Yahoo!'s total net assets are worth $35 billion, and it spent $1 billion on buybacks. Its new asset value will be $34 billion. With 1 billion shares outstanding, each share price will fall from $35 to $34, unless Yahoo! is able to purchase 2.85% of shares outstanding (1/35) with its $1 billion cash buyback, which would maintain the value of Yahoo! shares at $35.

Unless Yahoo! is able to buyback shares below their net asset value or potential net asset value, its share buyback program is a bad allocation of capital. If Yahoo! over pays for shares during its buyback, it will be destroying shareholder value instead of creating them.

In addition, buyback is only worth when the core business is good. However, Yahoo! is still a company that requires turnaround. The management may be positive about the future of Yahoo!, but they are suppose to, even if deep down they are not positive. Because turnaround carries risk that it may fail, it is better to return capital to shareholders than to perform share buyback.

I am a shareholder of Yahoo!, I am writing this article to show my view regarding Yahoo!'s capital return program. I am also not receiving compensation from the above company or any other company. Above are just my 2 cents view of the company's valuation and are by no means any form of recommendation to purchase the stock.

Monday, 13 October 2014

Where's my Pay Raise?

04:41 No comments

Ever wonder why is inflation almost always rising faster than my paycheck and why that stingy boss of mine who is earning so much is not raising my pay!

Everyone would always wish to earn faster than inflation, but this rarely happens, especially if you have been staying in the same post for a very long time!

*Inflation is the increasing of price of the things you buy

Reasons my pay grow slower than inflation:
  1.  Because in order to pay you higher wages, your boss first need to make the extra revenue. To make that extra revenue, your boss have to raise prices first. So prices go up before your pay goes up.
  2. Prices can go up for reasons other than your pay - such as raw materials, taxes etc. And most of the time there's a limit to how much prices can go up - I think no one wish to eat a cheese burger for $10. So what happens is your boss increase prices of the things he/she sell, but use the extra revenue to pay for everything else but your pay (because you will keep working until one day you cannot take it and quit but your boss's business will fail the minute he fails to pay the suppliers etc).
  1. Create 2nd or 3rd income stream while you can. When you start working, try to save and invest more to create your 2nd income stream and gradually a 3rd. You could start first by setting a small amount of money every month to buy index funds (good if you know nothing about investment and do not wish to know either). Next is by maybe finding a part-time freelance job like free-lance web designing or dance teacher, something that you can help others while making a income for yourself.
  2. Become the boss yourself if you think your boss is making way too much money. No one became a boss to pay their employees more than what the boss is earning (you could become one such boss if you like). If you like to earn more, take it to the next level and become a boss.
  3. Keep improving yourself! Keep learning new skills and keep upgrading your skills. The more skills you have, the more likely you will be able to perform better than others. As Warren Buffett (one of the world's richest person) says, "The best investment you can make is in yourself". As you improve yourself, you become more productive and have a higher chance of promoting, thus able to command a higher salary.

Sunday, 12 October 2014

Cordlife: Analysis

Recently, I have stumbled across a healthcare-related company that is listed on the Singapore Exchange. It appeared on my stock screener and after investigating its financials, I decided to write an opinion of its performance.

Cordlife is a company that stores cord blood. Scientifically proven, cord blood is important, even long after a baby’s birth and can provide a source of stem cells should the need ever arise for a stem cell transplant. Hence, there are numerous health benefits that can be used to treat future diseases.

From its annual reports, the future growth of Cordlife proves to be exciting. It is currently expanding in both scope and scale, improving its future streams of income.

  1. Cordlife has entered into a new licensing agreement with StemLife to explore and develop umbilical cord lining related new services based on cellular technology in Malaysia. This is in addition to the potential synergies of working with StemLife to cross-sell services and products in Malaysia and Thailand. It has also secured new licensing agreements to improve its revenue stream.
  2. It has also introduced an advanced non-invasive metabolic screening service known as Metascreen™.
  1. Cordlife has expanded operations in India, the Philippines, and Indonesia and invested 31.81% interest in Malaysia-listed StemLife. These should start to contribute positively to the Group’s bottom line in FY2014.
  2. Cordlife has entered into a convertible note issued by CCBC which can  potentially raise its interest in China’s largest cord blood banking operator to 17.79%. This can also serve as an additional income stream from the annual coupon payments. 

  1. Compared to its peers, Cordlife is also able to enjoy higher margins and a wider product reach due to its strategic alliances. 
  2. Being a cord blood company, it depends on its assets to generate income. Hence, to judge its performance, we can use return on assets ratio. This can be a risk factor as the ratio has been decreasing at a steady trend since 2010 from 10.37% to 3.60%. This could be due to it increasing its assets while its income varies. However, this would stabilize later as currently the cord blood banking is still a relatively new and niche industry. Furthermore, Cordlife can obtain more market share using the first mover advantage.
  3. Its debt levels and liquidity ratios are also of good standards. Its current and quick ratios have steadily increased from 1.00 to 3.06 and 0.97 to 2.93, from 2010 to 2014 respectively. Its debt ratio, though increasing from 2010 to 2014, still remains at a healthy level of 9.00%.


  1. Relatively new and niche industry where customers need to be educated to realize its benefits. Hence, advertising costs could prove to be a concern.
  2. The sales channels in China is heavily reliant on its China allies.
  3. Its assets turnover ratio is decreasing, indicating that it is not efficient in deploying its assets to generate a revenue.
With these reasons, I suggest a BUY on this counter, especially since its present stock price is at a downtrend. Though there are inherent risks in its expansion strategies, I have faith in its management in mitigating and managing the company.

Note: Currently, I do not have any vested interest in the company.

Saturday, 11 October 2014

Weak Euro = Good US + Europe

Recently, a lot of analysts and economies are saying that a rising dollar and a near recession Europe is going to dampen the US economy and stock market growth. What is even worse as mentioned by those economists, is that Europe will be exporting their inflation to the US, which is going to make the bad situation worse. Today I am going to explain why I think it is not as bad as it sounds.

The economists are saying that a weaker Europe will result in the following problems:
  1. Euro will fall against USD, making US products more expensive to export to Europe
  2. US exports to Europe will fall, causing its Export market and hence the economic growth (GDP) to slow
  3. Because European products will be cheaper in the US due to a weak Euro, it would cause inflation in the US to possibly become deflation, which would cause the US economy more problems
However, I think that the negative part is over-rated. A weaker Euro against the USD is actually beneficial to both countries - Europe & US
  1. 70% of the US economy is consumption. A weaker Euro would increase the demand for European products. While 'Imports' will rise, but 'Consumption' will rise as well, which sort of neutralizes the effect a larger import has on the GDP. After all, what is imported has to be consumed.
  2. Secondly, the US is not a major export country, 'Exports' make up 14% of US GDP as of 2012 and Europe represents slightly more than 20% of it. Assuming a 20% dip in export to Europe, the impact on the US economy is 0.56%, which is pretty small. 
  3. It is not deflation we should be worried about but inflation. Importing deflation from Europe leads to lower US consumer prices and hence lower inflation. This encourages the Fed to maintain its low-interest rates slightly longer and for the bull market to last longer.
My take is: If you are invested in the US, love the weaker Euro, Europe because it encourages low inflation and longer low-interest rates. If you are invested in Europe, a lower Euro will make European goods more attractive overseas, boost exports and improve their economy.

We need to understand the key driver of their economies to know how they grow. The US grow by consumption while Europe grows by Exports.

Thursday, 9 October 2014

Annuities, Have or Not-to-Have

04:10 No comments

Today's topic will be on annuities. The average public has the tendency to buy annuities thinking that they are the best product available in the market for future cash flows, especially during retirement.

Actually, many people do not know what an annuity does, how it works, and how is it beneficial. So today I am going to breakdown what annuities are about.

By definition from Investopedia:

 In a simple sense, you basically do the following thing:
  1. Find an insurance company/bank and buy an annuity from them
  2. What usually happens is you pay a monthly or yearly amount to them (say you start paying at age 30).
  3. You keep paying until you reach retirement age (say age 60) and after that, the bank/insurance company starts paying you a monthly income to sustain your living.
Sounds like a simple, beautiful and "cannot-go-wrong" thing?

On the consumer/buyer side, it is this simple. But it gets more complex when it goes to behind the scenes. This is what the financial institutions do with your money in general.
  1. They take your money (monthly or annual), pay commissions to the person who managed to get you to buy the product.
  2. The remainder gets invested into bonds, stocks, and other financial products.
  3. The investment returns they make, the institutions would take a cut to pay for their expenses (say 5%-10% of the returns).
  4. What is left is then given back to the consumer over a period of time as income.
 Still convinced that it is a great product? Read below on its risk:
  1. If the bank/insurance company goes bankrupt, you lose your annuities paid (depending on the situation you MIGHT get back some of your money back).
  2. Hypothetically, for every $100 you put into the product, imagine some money going to the agent, some money going to pay for the institutions' expense, and the remainder (probably $80-$90) gets invested.
  3. The institutions use your money to buy stocks and bonds, then they take a cut from your returns. This means they cannot actually give you better returns than if you just invest in stocks and bonds yourself (sure there are risk investing yourself, especially if you know nothing. But, if you are investing for your retirement, read to know that investing might not be as dangerous as you think!).
Ken Fisher, a long-time Forbes columnist and well-known guru investor shares his hate for annuities.
Watch the video to learn more about the product!

Wednesday, 1 October 2014

High Dollar Kills the Market?

23:45 No comments

Today's topic is on whether the stock market will be going down if the dollar remain this high or went even higher.

 I saw a lot of people saying that a higher dollar would kill the US economy and affect the stock market because:
1) it hurt exports
2) it makes US goods and services more expensive
3) there might be deflationary concerns

Below shows 3 charts:
1) S&P 500 10 year returns
2) S&P 500 10 year Total Return
3) The Dollar Index (^DXY)

So I will answer all the doubts as to why I believe that a strong dollar will not hurt the US economy, its recovery and the stock market.


The current dollar level is still far from the highest point in 2006.

i) During the period of 2004 to mid 2006, the dollar remained at range above the current level, and the market continue to climb up until the end of 2008 where the Lehman Brother crisis hit.

ii) Since December 2009, the dollar rose all the way till its peak in June 2010. The stock market followed and peak at April 2010.

iii) Since may 2011, the dollar has been steadily rising till now, so has the stock market, and without a correction.

However, this does not mean that a rising dollar is good to the stock market and a falling dollar is bad for the stock market.

i) From November 2005 to october 2007, the dollar fell from peak to trough, the stock market however during this period rose to its peak.

ii) During March 2009 till December 2009, the dollar fell from peak to near trough, the stock market also over the same period rose by nearly 90%. However, this can be attributed to a bounce back from the 2008 crisis.

Through the technicals, it is shown that the dollar has no relationship on how the stock market will perform.


1) A strong dollar will not hurt economic growth, instead, it would more likely improve economic growth. US has been a major importer of goods from abroad. A stronger dollar would only make imports cheaper, which benefits consumers and boost consumptions.  Companies would also face lower cost of raw materials, hence improving profit margins.

2) The US is a major consumption-based or consumption-driven economy, especially domestic consumption. A rising dollar will not hurt domestic consumption because things are going to be cheaper thanks to a stronger dollar and they are at least not as affected as countries trading with the US.

Saying that I am not going to eat at Mcdonalds because a rising dollar will make my burger more expensive in my view is ridiculous. Stronger dollar means each of my dollar is going to get me more stuff, I am going to be able to buy more stuff than before.

3) Deflationary concern is one of the least concern I have regarding the US market and economy right now. With the Fed keeping rates at record low and a possible action of QE anything things looks like they are going in the wrong direction, I am least afraid of a deflation. I am instead more worry about inflation that will be coming over the next 5 to 10 years (Will be writing another article on this).

4) A strong currency mostly affect only those export determinant countries like China, Japan and South Korea. These countries when hit with a higher currency value (Higher Yuan, Yen or Won) will result in their exporting products becoming more expansive and hence leads to a slower growth. However in the case of US, it is the opposite, hence a stronger dollar would make imports cheaper, reduce inflation, improve companies' margins - although it would make the reported earnings look bad because of USD reporting.

The way I see it, the dollar will not affect the market's current upward momentum. The market current sell-off because of a high dollar is a good buying opportunity.

Correction Overdue Follow-Up

05:31 No comments

I received some feedback from people who read my previous post (A Correction Overdue).
One of it was that the chart presented in the post was not enough an evident to prove that correction is not on its way.
Secondly was that the economy is growing at around 2%-4% while the stock market has advanced 7% excluding dividends, stock market grew 2times the economy, which means it is ahead of economy by 2 times.

Firstly, thank you for the feedback. All feedback are welcome and I certainly hope that there will be more to come!

1) So first, I wish to show more evidence that a correction will not occur anytime soon and it is based on the charts. Fundamentally I have proven that a correction will not occur because the stock market is not running ahead of the economy.
Below is the chart that I showed on my previous post on the market:

Below is the chart that shows the last correction in 2010:

A correction occurs when the stock market has charged forward faster than the economy is growing. Based on the above 2010 chart, between the period of February to May (less than 3months), the market went up by nearly 14%. Technically, the economy did not growth that much during the same period, which I guess led to the sell-off near end of April.

Historically, any short-term big rise are often followed by a correction. 'Short-term' meaning within a quarter and 'big rise' usually more than 10%.

Another chart below is from the 1999 correction where the market went up by 14% between June to August (less than 3months) and that was followed by a correction that led to the market dropping back to June's levels.

I believe a lot of the above examples can be found as we research through the history of corrections. Up till now, the market is moving cautiously, where there has not been a more than 10% gain within a period of 3 months. So fundamentally (economy) and technically (charts), a correction is very unlikely to happen within the next several months.

2) The economy is growing at a rate lower than the stock market, this must mean a correction is coming soon right? Well, actually no. The stock market is actually leading ahead of the GDP instead of GDP leading the stock market. GDP data however, is used to create a correction in situations where the stock market grow more than the economy did.

The stock market performance one way or another, is a projection of future growth. GDP data however, is a reflection of past growth. So even though the GDP did not showed good results, the market can still perform well if the market thinks that the future GDP growth will be better.

GDP data is also not reflective of stock market performance because of a lot other factors.
i) Buybacks - this reduce stock supply which leads to higher prices
ii) GDP measures a country's consumption, export and investment. However, it does not measure profits, which is the key determinant of valuating the stock market.
iii) GDP measures domestic progress. However, many companies listed on the US stock exchanges are global companies with global revenues not shown on GDP data. Apple selling an iPhone in China is counted as GDP in China but not in the US.

I hope this clarifies a lot of the queries. Please do comment on any more doubts and I will try my best to answer them!
Thank you!