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No. of Recommendations: 14
Minor note - but I wanted to pound the hammer on checklists. I just missed something on - can't believe this - my largest holding that absolutely changed my perception of the business. Markit - which is a wonderful cash generating business with lots of recurring revenue, has a serious and maybe fatal option problem.

Options galore - like candy. Like giving out 7.6m options last year or 4% of their count. Granted, they did have 2.8m cancellations in 2014 too but 4% is ridiculous. In the latest earnings report, share count was up - 2% - in successive quarters.

This is just insane. Now, the company recently came public, and we know companies that moderate their option policies when they left the private world behind, but there is no sign of that. And a company that gives out grants like this almost can't, in my mind, be a long-term holding and that's how I was treating MRKT and sizing it.

So, how I miss this? I just didn't pay attention to it - again, cause I knew that you get distortions with IPOs. But when the 20-F came out, there is was - the ugly option table on F-61. But I wasn't pursuing the 20-F notes until another money manager mentioned his issue with the company.

A checklist picks this up. And it doesn't have to be a separate checklist. Your company evaluations simply have to contain required fields (e.g., see management line below) - and I was neglecting to fill mine out. No longer.

Posted before, but maybe you can find this helpful

Writing and Updating a Company Profile - Pausing the Key to Everything

Category – include forward numbers based on estimates
TIS Ownership and Trading History; How Long have you Owned?
3 and 5 Year CF and CapEx; Options; Proxy
Previous Evaluation
Key factors
• Decide or review prior ones – could be category or industry related
• Economic Moat
• What is happening to make earnings go up?
• Brief overview of EPS report
• Possible Catalysts to drive Value
Five/Four Variables (ability to boost sales, to return capital to shareholders, improve margins, and expand PE multiple
• Margins
? High/low, trends, and level
• Top line growth
• Level of saturation – relates to PE multiples and category
? What is past sales growth rates in prior years and quarters?
? What does company say? Either from calls or directly asking them.
? What are growth rates for other companies?
• Balance Sheet/Capital allocation
? Capital allocation: dividends, buybacks, acquisitions on a 3-5 year basis
? For acquisitions, usually PS is the most applicable measure
• Management – Good or Not? Proxy, Options, and Capital Allocation
? Should You Call Company? What are Three Most Important Questions?
• Positives/Negatives (as needed)
• Your Thesis: Story Better, worse or same; Price Up or Down or Flat
• Two-minute drill (why I’m interested, pitfalls, what has to happen for business/stock to succeed)
• Items important for category (review Lynch) and industry
• On Valuation, frame in terms of expectations embedded in the price as to whether the stock is attractive or not
• The better you can define the path to higher earnings, the better the evaluation; specifically identify factors behind future earnings growth? reduce costs; raise prices; expand into new markets; sell more of its product in the old markets; or revitalize, close or otherwise dispose of a losing operation
• Competitors?
Include Buy/No Buy
? If a buy, give opinion on position size and holding period
? We can own anything, at any size and absolute judgments aren’t necessary
? Does the evaluation reflect a fully formed conclusion?
? If not, what is the next step? More time?
? How many positive or negative statements are there in the evaluation? If positive, higher position?
? Set a time to re-read for all buys

Slow Growers - dividend history and payout ratio
Stalwarts – PE Ratio, long-term growth rate
Fast Growers - merit the PE being assigned; VL or other estimates used realistic; forward PE is what; growth rate in earnings has been in recent years; saturation and inning of growth
Turnarounds - Balance sheet – debt structure; plan for turning

i'm back - part-time now, but i'm back
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No. of Recommendations: 4
fwiw, I still do this: short and simple

only thing I've added is a summation of 5 years of buybacks
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No. of Recommendations: 4
fwiw, the stock is up - my guess is because the BS doesn't matter anymore - you buy 350m in stock and that sounds good but it decreases the share count by 1 to 2% at most.

A helpful chart provided by MRKT which illustrates the disease that is options:

• 188.7 with $23 stock price
• 192 with $27
• 198 with $30

they started the year with 188m
So if the price rises by $4 or so or less than 15% you get another 10m to your count or 300m in market value. So if you buy 350m in stock then at $30 your count goes down 11.6m - which offsets the 10m by 1.6m. And sure, there is a cash and tax benefit to option exercises - which is like saying that to get your kid to pass a course at high school you help him cheat instead of study - but this is ridiculous. And it doesn't include further dilution produced this year. Maybe they will get more reasonable, but the call was not inspiring at all. They are buying shares to control dilution, not reducing issuances to reduce dilution*. Maybe their culture simply doesn't allow it. I don't know. But it is so annoying. At least be honest.

Course, maybe the stock goes up $35. An announcement and debt can do it, and people love it when you got from 0.5x leverage to 2x cause debt is meaningless now. And option creep is a long-term issue for most people (even me).

I'm seeing this over and over now - debt is irrelevant, absolutely irrelevant. Not only irrelevant, but it is a wonderful thing cause it is so low cost and you are an idiot if you don't face the reality that it really isn't there (and in some ways it isn't - long term debt if long enough and fixed can do magical things). So use cap instead of enterprise value in valuing stocks, and embrace the new reality - that jacking up your BS with debt is the way to stock market riches. I say this without a trace of irony cause I'm a fuddy-duddy who thinks debt for the purposes of manipulation is highly questionable. And it seems to lead people to do dangerous and stupid things, but who I am to question the reality of things? It sure makes it harder to invest.


With this framework in mind, today, I'm pleased to say that our Board has authorized a share repurchase program of up to $500 million of our common shares over the next two years. This demonstrates our commitment to driving shareholder value including offsetting some of the dilution from option exercise and ongoing equity compensation awards.
Diluted share count increased 7.3% due to both our higher average share price used to calculate option dilution and option exercises into shares since Q1 2014. We've included for your reference, a slide in the appendix with further details on both the share count movement for this quarter and an overview of our standing share options. The $500 million buyback authorization announced today is intended to allow us to manage share count more actively going forward.

there you go - the buyback " intended to allow us to "manage" share count more actively going forward". From our balance sheet to our pockets - and bypassing you idiot shareholder.
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No. of Recommendations: 2
Just a random example of bond math, fwiw.

Firm issues 4% bonds at par for 10 years, rates stay flat, price is 100 throughout by definition, PV is $67.5 if I've done my math right.

Firm issues 4% at par, rates go to 8%, price falls to $72.8, PV is $33.7, or half of the scenario above, as you'd expect.

Of course, rates won't go up 400bps overnight, just as an example.

BUT, if you can handle the leverage, buying $100 of stock now for price of low-rate, tax-deductible interest, and owe $67.5 in the future

OR if you think rates are destined to rise significantly, for $33.7 in the future + tax-deductible interest, well....seems like you should buyback stock.

N.B. this has nothing to do with GM's Option Egregiousness argument above. Just talking about buybacks at a simplified level.
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No. of Recommendations: 2
then just buy OUTR at 5x FCF :)
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