Thursday, March 27, 2008

Good and bad news for Oracle

Oracle had a pretty good third quarter, but not good enough for Wall Street's standards. Earnings came in at 26¢, which was 6¢ better than the previous year, but 4¢ less than the average analyst prediction. I don't see anything too surprising about the numbers on first inspection—there aren't as many companies buying new licenses, but current customers still seem to be paying. But Oracle's shares fell $1.50 or so this morning.

Meanwhile, my short call position gained about 75¢ over the same time period, which effectively cushioned half of the loss for me. Further, the news does not substantially lower my long-term opinion of Oracle's value, though it did reduce the odds I'd get $21 for my shares. So selling the call option has served my purpose. Interestingly, the call ought to have served the purpose of whoever bought it as well. Rather than buying shares and losing $1.50 overnight, the buyer would have lost only 75¢. And the insurance would have required less cash be tied up than if the shares were bought outright. Altogether, it was a fair exchange.

With 22 days remaining before expiration, there the odds the option will be exercised are less than 30%

Wednesday, March 19, 2008

Why I sold another call option on Oracle

I sold a call option on Oracle with a strike price of $21 that expires in April. I think $21 is near the bottom of Oracle's fair value range and I'm willing to be paid 75¢ for the risk it will be worth more than $21 in a month. Oracle took a little dive today after I sold the call and the odds that it will be exercised are about 2 in 5 as of right now. I'll also be happy to get the cash if I need to sell—Oracle is most nearly fully valued of my positions.

Monday, March 10, 2008

Here comes the activist

Last night on 60 Minutes, there was a story on Carl Icahn, activist shareholder/corporate raider. I caught myself wondering if he would be interested in a small, unconventional mattress company based in Minneapolis. Of course, the entire company is far too small for him to bother with, but as luck would have it, the George Hall (another activist shareholder) has targeted Select Comfort.

The letter to Select Comfort lists a number of proposals, which are not terribly radical, but do highlight several management failures. Most troubling to me are comments about CEO William R. McLaughlin's recent announcement about his salary:

Further, the Chief Executive Officer's agreement to forgo his base salary until same store sales increase by at least 1% for four consecutive weeks, while good for public relations, is inconsistent with shareholder interests, since improvement of the Company's financial performance requires a greater length of same store sales improvement than four weeks. Further, this limited, short test allows for alteration of marketing spending in order for the Chief Executive Officer to achieve his limited performance goals, which may have nothing to do with appropriate marketing spending for the Company and inconsistent with the Company improving its annual financial performance.
Looking at the text of Mr. McLaughlin's letter, I'm forced to agree with his critics—he seems to be an untrustworthy manager. At this point, he has set the bar so low that practically anyone with some business experience can clear it. I'm afraid I now agree with those who have called for him to resign.

Reading between lines, implementing SAP seems to have become a death march. More money will not solve the problem, so shareholders ought to consider the cost so far to be sunk. Also, as the letter spells out, the SAP installation is probably overly ambitious for a company like Select Comfort, which may never recoup the savings needed to pay for the system.

I don't know if I agree with the idea that the company should close low performing stores. The letter suggests returning to the company's direct marketing roots and eliminating the wholesale business. I think the key to the problem is understanding why some stores are failing. For instance, it does not seem like stores are getting the advertising coverage they need. If that's the case, closing the stores might not be the most productive idea.

Overall, I welcome Mr. Hall's investment and I hope management will open up their operation to his input. An outside pair of eyes can only help.

Friday, March 07, 2008

Portfolio volatility

Thanks in part to abysmal performances by First Marblehead and Select Comfort, my portfolio is sinking like a rock. It has now dropped decisively below two of my favorite benchmarks: Berkshire Hathaway and inflation + 10%. Worse, I think the official measure of inflation I use is understated and Berkshire is undervalued. Meanwhile, the S&P 500 index is "gaining" ground (by dropping less quickly than my IRA), so the recent past has been harsh.

Nobody likes to be wrong and the standard response to a situation like this would be to say that luck turned against me. Owning two companies that have been particularly hard hit by the housing and securitization busts might seem like unfortunate timing except that I've bought both companies on the way down knowing the strikes against them. It's ugly and I can't blame luck.

The good news would be that I haven't actually lost money on these shares. Both companies will see their fortunes reverse in a few years. I expect current prices will seem unimaginable. Further, there is no particular reason for me to sell these companies until their fair value is reached. So I need to ignore the stock charts wiggling up and down for the moment.