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The main premise behind most investing techniques is that the value appreciates due to retained earnings which either go into equity (e.g. cash) or stock buy-back plans. Since tweeners are typically late-stage growth companies, I thought it apropos to ask if anyone has ever seen a tweener that moved into a period of a decreasing number of outstanding shares? I have only seen companies that have big buy-backs that just cover the new shares issued, so there is no net gain to the investor. Are share buy-backs not a viable method of passing earnings to investors?

-Gary
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Gary,
The problem with Tweening, as I see it, is the fact that they now have competition. They are, by definition, losing market share- if you had no serious competition as a Breaker, but had a serious competitor appear in order for you to be Tweened, you surely have to be losing share, I think.

Now the question is this: What do you want your company to do when it is facing serious threats to market share? Personally, I would like to see it work harder to defend it's market share, rather than use money to look after the share price. If they just worry about the share price, they can lose the game and Rattle away. If they retain the earnings, they can invest the money to strengthen their market position.

Remember, just because a company has been Tweened does not mean that it cannot grow- Intel has been growing for years, despite being Tweened. The important thing with retention of eanings is looking at expansion potential, not Tweenerhood. If the market is expanding, then several companies can compete and all of them expand rapidly.

I hope this makes sense,

angussb.
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angussb.

OK. Your argument makes sense, but begs the question. If Tweeners spend their massive earnings capabilities on defending their market share, the investor is no better off than when he bought it way back for its potential growth, except that its potential growth is mostly behind it. Besides that, a Tweener has usually grown a bureaucracy that no longer allows it to compete long-term and thus such efforts are futile. In the end, the company eats up its reserves and the investor (whom held the entire time) ends up with nothing.

INTC is one of the best Tweeners, but it has not been decreasing its net outstanding shares or growing equity to catch up to its market price. If INTC were liquidated today, a shareholder would at best get ten cents on the dollar. All in all, to make money, one has to decide the right time to sell based upon his perception of what others will perceive its value, not its fundamental value. Therefore, this is speculation and not investing. It may be speculation signals that work, but that is until "the market" internalizes the signals that make it work.

Most of the market seems like a speculative game to me, although I enjoy it (in the same way I enjoy Blackjack).

-Gary
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Gary,
you seem to be confusing market value with book value.

Book value can be a useful benchmark for investing. This is the "liquidation" value of the company. Value investors will often look for companies below book value, but they are the minority of the market. If you are looking at Breakers, you are extremely unlikely to find a successful one anywhere near book value, it is more likely with more mature companies. Tweeners will be closer to the book value, but shouldn't go near to it.

The thing to remember is that you are investing in an ongoing concern. If the company is a going concern, there is no way that you should expect it to be valued at book value- this would mean that you could not see it making any money in the future. I expect to invest in companies that will make money in the future. I am therefore willing to pay more to have a share of this future cash flow.

Now, just because the company has Tweened does not mean that it's growth has to slow down. A company can be a successful Breaker and be Tweened before the period of maximum growth rate. Tweening does not mean slowing growth. Now the question is this- how is it best to invest your money. Well, I would say that the best investments for returns are successful Breakers, but they are high risk and a lot of apparent Breakers fail. So, just because your company has been Tweened does not mean that you have a Breaker to invest in, or you may feel that you are overweighted in that sector. So, when the company Tweens, you have a choice on whether to sell or hold. If you hold, and it gets through the Tweener stage successfully, you will end up with a Maker, which may give you greater stability in the future. Now, if you believe in the company, why sell the stock, pay a tax bill on your profits, then invest in a Maker, when you could hold on and end up with a maker without paying tax in the meantime?

The main stumbling block for many with Tweening is the crash, which can be 40% and occurs when it is seen to be Tweened. The problem is knowing when this will be. If the company has already gone through the drop, it makes sense to me to hold if you believe it will become a Maker. By following the financial story, you will see if it is on track.

As to whether to invest fresh money in a Tweener, I don't know. Personally, I would prefer not to, because if I didn't have faith in it as a Breaker, then I would have less faith in it as Tweener, so I would rather sit back and wait for it to demonstrate Makerhood. After all, this is one of the most dangerous parts of the Breaker/Maker story, more unpredictable than the other 2 parts. As tax considerations are not a factor, the reasons for having the stock in your portfolio are less since the risks are the same as if you held it from Breakerhood but you have no tax considerations to sway you at all.

Now, the thing about management is that they decide upon allocation of capital. The reason to use capital for dividends or stock buybacks is that they have no better way to invest, e.g. by returning the funds to the shareholders, the shareholder will benefit more than by retaining them. Now, if we assume that the shareholders can expect a return of 11% per annum from the market, the directors are warranted in retaining the funds if they expect retained earnings to do better than this. Now, if the market is growing, the company is holding it's market share and as a result the return is greater than the market, surely they have acted correctly in retaining the funds? If they pay out the money but lose market share, the market will devalue them for underperforming compared to their competitors, thus you will actually lose by the lack of share price growth.

As for Tweeners building a beaurocracy and therefore being unable to compete, Coke was Tweened decades ago and yet their shareholders, until very recently, were quite satisfied, and, if Ivester can get his act together, or his successor, they should be again. G.E. has also been Tweened for a long time, and yet they have also produced some nice returns over the last 15 years or so.

I hope this helps a bit, I'm still learning myself, so feel free to rebut,

angussb.
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> you seem to be confusing market value with book value.

Nope, I understand market and book values quite well, but I am afraid I am unable to clearly make my point :-(

I agree with everything you are saying about whether or not to buy a tweener vs a breaker and all that, if one is to look at it as an application of the "formula" of when to buy based upon Maker or Breaker criteria. The whole point of my orginal post is to question the underpinnings of the dogma you repeat next:

> Now, the thing about management is that they decide upon allocation of capital. The reason to use capital for dividends or stock buybacks is that they have no better way to invest, e.g. by returning the funds to the shareholders, the shareholder will benefit more than by retaining them. Now, if we assume that the shareholders can expect a return of 11% per annum from the market, the directors are warranted in retaining the funds if they expect retained earnings to do better than this. Now, if the market is growing, the company is holding it's market share and as a result the return is greater than the market, surely they have acted correctly in retaining the funds? If they pay out the money but lose market share, the market will devalue them for underperforming compared to their competitors, thus you will actually lose by the lack of share price growth.

These days, it seems most companies elect to retain funds for reinvestment in the business at a supposedly higher return than the investor would get otherwise. I am essentially trying to make two points:

(1) Doing so presupposes that the company knows what is best for its shareholders' money and what returns they would get elsewhere.

(2) Most importantly, this reinvestment supposes that the payout will be just that much bigger down the line.

While #1 should be obvious, it is #2 that is the underpinning of "New Era" style stocks.

Think of it like this. If I were to offer you a 10 yr CD that pays 20% interest and reinvests all of its dividends for maximal compounding, you might be excited and want in (a hypothetical Maker/Breaker stock). If I were to then try and slip a disclosure by you that said that the dividends in the 7-10 years would be negative and would eat into your principle, you would send me packing. Although one theoretically gets 20% return for 7 years, it is not real because it is never realized. The ONLY way to realize this return is to get Johnny down the street so hyped on it in the 5th year, that you can sell him your CD with 5 year to go.

I really think this is analogous to a Maker moving into Tweenerhood. Because your "real" returns from company operations are rolled back into operations, the only way to realize a gain is either through increased book value (which can be considered for accounting purposes) or by selling it to a bigger fool (pun intended), as long as my premise that most great growth companies will eventually fall on hard or not-so-profit-growing times, which they must. If realized gains rely on selling out before the fall, then this is by definition "speculation".

> As for Tweeners building a beaurocracy and therefore being unable to compete, Coke was Tweened decades ago and yet their shareholders, until very recently, were quite satisfied, and, if Ivester can get his act together, or his successor, they should be again. G.E. has also been Tweened for a long time, and yet they have also produced some nice returns over the last 15 years or so.

You make my point exactly with your Coke example. Coke is probably the best and longest Tweener, yet it is now reverting back to the mean. Maybe GE is still one of the lucky ones, but its day will come.

I hope my analogy make my point better.

-Gary

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Gary,
If someone can guarantee that a company will go into a permanent losing position by a certain date, it will start a death rattle. However, the idea of holding on to Tweeners is that they will continue to dominate the field, in which case they will become Makers. Now, there are very few Makers with no competition, otherwise the Monopoly Status section would not make sense. So, we are looking for companies that we believe have effective competition but will end up as dominant. Once the dominance is clear, they have a greater ability to flex their muscles, so that they can reshape the finances to rebuild their financila position, which in turn leads to greater Maker status.

How long can a Maker rule? Who knows? I certainly don't. Makers will always have competitors, as others want to take the prize. Fortunes will rise and fall. But just having attained Maker staus gives them more time and money to regain the leadership than they would have if they were just running with the pack.

I personally don't invest in Tweeners, being uncomfortable with the risks, and am only just starting to look at Breakers, so it is all just theory to me. It's interesting to have this discussion, because it helps me to work out my future strategy. The main thing is to be comfortable with whatever decisions you make for yourself. One of the key factors in a Breaker is the management, if I didn't believe in them, I wouldn't have invested during the Breaker stage. That belief should, hopefully, be sustained whilst they are being Tweened, so I would hope that I could trust them to make the right decision regarding retaining funds, otherwise I wouldn't have wanted my money there either.

Make sense? Any other thoughts?

angussb.
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