Pro weekly digest_ from macro to micro – a discussion with hayden cole – caterpillar inc. (nyse_cat) _ seeking alpha

Welcome to the latest issue of the PRO Weekly Digest. Electricity invented in homes Every Saturday for Seeking Alpha PRO subscribers and Sunday for all other Seeking Alpha users, we publish highlights from our PRO coverage as well as feature interviews and other notable goings-on with SA PRO. Electricity production in the us Comment below or email us at pro-editors at to let us know what you think. Electricity news philippines Find past editions here .

Hayden Cole, a long-time Seeking Alpha contributor, uses macro trends for his long/short portfolio. Hp gas online registration Notable wins with using this approach include Chipotle (NYSE: CMG) and Caterpillar (NYSE: CAT). Gas and water llc We emailed with Hayden about the importance of using the correct valuation metrics, common traps investors fall into, the alpha opportunities in large caps (they do exist!) and how the relentless bid in the market has created a compelling short opportunity in a familiar name, as well as in an Australian retailer.

Hayden Cole: I’ll approach new ideas from both angles. Electricity quiz for grade 5 Sometimes I might identify a potentially interesting macro trend and I’ll look to build conviction around that. Hp electricity bill payment online I’ll then look for individual companies that I believe present the best opportunities to express that idea. Electricity generation in usa For example in 2013 I was looking at the massive run-up in mining and energy capital expenditure that had occurred during the 2000’s, largely on the back of unprecedented fixed asset investment in China. Electricity word search j farkas answers It was evident that capacity expansion in many commodities had run too far and that capex in these industries was likely to see a period of prolonged mean reversion. Gas efficient cars 2012 That led me to start looking at capital equipment companies in the mining and energy sectors as potential shorts.

Other times I will start with bottom up analysis of individual names. Youtube gas station karaoke That might be sparked by findings from research into particular industries, write-ups from other investors, recent stock price movements, valuation screening, etc.

SA: Do you allow the macro or the micro (company-specific fundamentals) to override the other? For example, if there is a cyclical upswing in an industry does this preclude you from shorting any stocks in that industry (or force you to close the trade)?

HC: Generally, I’d say company-specific factors predominate. Gasco abu dhabi careers If the idea is compelling from a valuation perspective and there are clear catalysts, I will happily be short a company benefiting from favorable macro or industry tailwinds, or vice versa.

Often big valuation disconnects can result from investors extrapolating secular or cyclical factors too far into the future and that can create opportunities. Electricity voltage in canada Two recent successful examples of this on the short side would be Keurig (NASDAQ: GMCR) and CMG. Gas 78 facebook Both companies were leaders in their industries benefiting from favorable industry dynamics (the trend towards single serve coffee pods in the case of GMCR, and fast casual dining in the case of CMG) but investors had far too optimistic expectations about the growth runway for both firms, and so inevitably any bad news was a potential catalyst for a significant price correction.

Conversely, so much continued growth was already priced in that even if these companies executed perfectly and my thesis proved to be wrong, the downside was comparatively limited.

Having said that if macro factors are fundamental to the thesis, I will certainly consider exiting a trade if those factors reverse or turn out not to be as significant as expected.

SA: You’ve had some great calls on highly visible stocks (shorting CAT in April 2014; shorting CMG in September 2015) – what did you see that the market missed? Do you usually focus on larger companies, and where do you find an edge if so given all the focus given to them?

HC: With regard to CAT, I think investors didn’t (and largely still don’t) appreciate how leveraged CAT has become to the global commodity super-cycle; particularly as a result of the billions spent on (often ill-timed) acquisitions under the outgoing CEO in rail, power generation and mining. Gas house They still look at Caterpillar as primarily a North American construction equipment company, even though that’s now less than 20% of their business.

I think investors understand that CAT is a cyclical business but didn’t and still don’t grasp the extent to which the decade or so to 2012 was not your typical cyclical upswing, or just how prolonged the downturn is ultimately likely to be. Power per kwh When looking at cyclical companies, I think most investors’ (especially retail investors) time horizon is far too short. V gashi halil bytyqi Often you need to consider at least 20 years of history to really appreciate the dynamics of how a company’s end markets may be evolving over time.

With CMG I think investors were making a couple of fundamental mistakes – valuing the company on growth assumptions that were unrealistic given how close the concept was to saturation in the US, and not appreciating just how competitive the fast casual space was becoming with the proliferation of so many new, well funded fast causal concepts. Gas stoichiometry lab As a result the company was extremely vulnerable to any perceived growth slowdown and/or migration of customer towards many of the newer, fast growing fast casual concepts.

The catalyst turned out to be the e-coli outbreak at a number of Chipotle restaurants in 2015, but I believe it was largely a case of accelerating the inevitable.

I run a reasonably concentrated portfolio, so on the short side my primary focus is on risk mitigation and so I often favor shorting larger companies. Gas key staking Large, low growth companies with significant leverage and apparently modest valuations with underlying structural issues can often be better shorts than smaller companies with (in theory) much more significant potential downside. Gas definition physics I would rather short a company with 30% downside and minimal takeover risk than a stock with a dubious business model and promotional management, which might double on me before ultimately collapsing to zero, or be bought out at a significant premium.

There are a number of situations I think where there may be an opportunity to exploit mispricing of larger companies. Gas monkey monster truck hellcat For cyclical companies, investor tendency to extrapolate the recent past often creates opportunities on either the long or the short side. Electricity hero names Another source of opportunities can be popular consumer facing companies with recognizable brands, which often attract valuation premiums that are unjustified by fundamentals, particularly when coupled with heavy retail investor ownership. Chapter 7 electricity These premiums can often evaporate quickly when those companies show early signs of falling out of favor.

A third would be identifying companies for whom the addressable market is grossly overstated (A theme often perpetuated by sell side analysts), particularly with high growth companies. E85 gasoline The stock in these companies will often drop like a stone when it becomes apparent that the addressable market turns out to be much smaller than investors are led to believe.

SA: How important is it for there to be catalysts for shorts or is overvaluation enough? For example, companies with broken business models or facing secular declines can (and do) keep going up seemingly against all reasoning? As David Einhorn said “twice a silly price is not twice as silly; it’s still just silly”.

HC: Overvaluation is certainly necessary but not sufficient – identifying potential catalysts is extremely important. Electricity symbols Having said that, the more egregiously overvalued the company, almost by definition the more likely a catalyst will eventuate that will see the stock price come back down to earth. Gas oil ratio chainsaw Equally, the more sources of leverage you can identify, whether it be financial leverage, operating leverage or customer /geographic concentration, the more likely even a modest negative catalyst will have an outsized impact on the stock price.

Typically with shorts I look for multiple negative catalyst that will potentially eventuate within the next 6 months (although the timing is always difficult to predict). Grade 6 electricity worksheets Obviously the more high probability catalysts you can identify, the better. Power company near me An example of a current short position with multiple potential catalyst would be Cardtronics (NASDAQ: CATM); the company is in the secularly declining ATM business; is about to lose their largest customer contract; has large exposure to the UK and the potential implications from Brexit and has significant financial leverage and exposure to interest rate normalization via floating rate debt and vault cash expenses.

SA: What valuation metrics do you use to determine if a stock is overvalued and for determining price targets? What are some of the advantages/disadvantages of using these metrics?

HC: I’ll use whatever valuation approach I believe best suits the company and will enable me to best reflect the valuation implications of my thesis. 7 cases movie The approach might be totally different even for companies within the same industry. Electricity and magnetism review game I’ll look at what I believe are the key value drivers for the company, and determine how my expectations for those value drivers differ from the market consensus. Electricity lyrics Then I’ll model those assumptions and see how my valuation estimates differ from the current market valuation.

When choosing an approach I think it’s important to understand the pitfalls and assumptions embedded in particular valuation approaches. Gastroenteritis There’s not much point doing peer analysis on a P/E basis if the companies have wildly different growth, capital structure or return on capital characteristics. 4 main gases in the atmosphere Conversely, looking at free cash flow when companies may be chronically under-investing to conserve cash is also not particularly meaningful.

For high growth firms I tend to favor a DCF approach, whereas for mature firms it might be sufficient to look at P/E, EV/EBIT or P/FCF ratios, adjusted for assumed future growth or margin assumptions. Gas x strips side effects For cyclical firms I am normally most concerned with estimating mid-cycle earnings or cash flow and how the company will move to those levels over time. Gas news australia For highly leveraged firms, I will focus on forecasting the implications of operating performance on cash flows.

SA: Has the relentless bid in the market created any new short opportunities? Any particular stock or industry you’ve taken a position in or are looking at?

HC: I think capital equipment companies are once again looking like very compelling shorts after rallying strongly this year, particularly companies who are globally diversified and with significant emerging market exposure.

E.g. Gas and water mix CAT is now trading at close to 30x 2017 earnings guidance – in my option the stock’s reaction to the prospect of infrastructure spending under Trump is way overblown given the likely time to lag (no meaningful spending likely before 2018) and the numerous political and fiscal hurdles that first need to be overcome to see significant spending come to fruition. Electricity storage association Even under a best case scenario, the projected infrastructure investment is modest by global standards – as I previously noted, North America construction is now less than 20% of CAT’s business.

I also believe investors are not adequately discounting the risk to CAT of potential trade protectionism – it’s worth remembering that CAT was a vocal proponent of the TPP, which Trump is vehemently opposed to. Gas smoker ribs China is also dealing with a number of challenging factors including cooling a resurgent housing market, a falling Yuan and resulting capital flight, and now rising inflation due to large increase in key commodity prices (which I believe are largely being driven by domestic speculation rather than underlying demand). Electricity in salt water experiment All this has concerning implications for emerging market and commodity producer demand that CAT is so dependent on.

Outside of the US, I believe there are currently compelling short opportunities related to the inevitable (and potentially imminent) collapse of the housing bubble in Australia. Gas prices going up House prices in Australia are among the most expensive globally relative to both incomes and rents, and Australian households are among the most indebted in the developed world, with most of that debt being held in mortgages.

Low interest rates have stimulated an unprecedented increase in housing supply over the last couple of years, particularly for apartments in the east coast cities. Electricity 101 pdf A large percentage of these are sold to Chinese buyers who are now having settlement difficultly due to lending restrictions from local banks and capital controls in China. Gas news in hindi As this significant wave of new supply hits the market moving into 2017 a major housing correction in Australia seems increasingly probable. La t gastrobar opiniones In addition to property developers and banks, I see compelling short opportunities in retailers who have been major beneficiaries of the housing bubble such as furniture, appliance and electronics retailer Harvey Norman ( OTCPK:HNORY), which is trading at a large multiple of peak earnings, is heavily exposed to a property downturn both via its furniture and appliance business as well as its significant commercial property portfolio. 6 gas laws It also faces the significant threat of Amazon’s likely entry into the Australian market in 2017.

PRO Managing Editor Daniel Shvartsman: PriceSmart (NASDAQ: PSMT) has managed to maintain an elevated multiple amid a bumpy year for the stock and the company’s operations. Electricity outage Vince Martin makes a compelling case for why there’s no there for the bull case, and why gravity may reassert itself.

SA Editor John Leonard, CFA: Real Talk Investments argues that Tyler Technologies (NYSE: TYL) is an overvalued roll-up with at least 50% downside as the “growth at all costs” strategy is starting to show cracks: software issues, acquisitions at 5x revenue which have legal troubles and lower than expected revenue (revenue misses in the last two quarters).

SA Editor Jeffrey Fischer: Even though Deere is a large-cap, this article presents a meaningful pure observation that merits investor attention. Electricity pick up lines Subsidiary interactions appear to mask the core operating performance of Deere.

SA Editor Marc Pentacoff: Safety In Value likes Canadian real estate company Morguard ( OTC:MRCBF). Electricity estimated bills The sum of the part valuation suggest modest upside but each “part” is conservatively valued. Gas and bloating after miscarriage With a high quality operator and an excellent track record, Morguard’s worth watching. Gas unlimited sugar land tx There is greater liquidity on the Toronto Stock Exchange under ticker TSE:MRC.

We are sharing another interview next week. Electricity and magnetism quiz questions PRO subscribers will automatically receive this in their inbox. K electric jobs If you are not a PRO subscriber and would like to be notified of this, click follow at the top of this article to follow the SA PRO Editors account, or click to subscribe to the free newsletter below to receive these in your inbox. E payment electricity bill mp And if you’re interested in SA PRO, check out the details here to sign up or learn more.

I wrote this article myself, and it expresses my own opinions. Gas arkansas I am not receiving compensation for it (other than from Seeking Alpha). 1940 gas station photos I have no business relationship with any company whose stock is mentioned in this article.