Expedia – After The Drop

In September I made an ill-timed move into Expedia stock, just in time to see the stock drop by 30% in November. The drop was primarily due to a bad earnings release – revenue number lower than expected and and EPS miss by $0.43 a share. In addition, the market is spooked by Google getting into the vacation rentals space in this already competitive environment.

So what to do now? Do I bail or buy on the dip? Arguably, its too late to bail on the stock:

So I need to see if it makes sense to add to my position – because if I liked it at $132 I should love it at $94. Looking at the forward estimates does’t paint a great picture:

For the last year for Forward Twelve Month estimates (FTM) have been consistently dropping, at even after the drop the forward price earnings growth (PEG) metric is historically high. So that explains the nervousness about the stock.

However, if you believe the nervousness that Google will keep squeezing Expedia is overdone, and they can stabilize EPS growth, I think there is some opportunity here. Short term I think the drop is overdone. This is still a stock that is growing earnings at 50% per year, with a PE below market. Not that I am super bullish on this stock long term, I just think its OK to play for a bounce on this. So in my case, I added to my position in late November to get by cost basis break-even lower. I think this will be a short term (1-2 month) trade, with the assumption that I will lighten up on my Expedia holdings after a month or so, and take the short term tax loss on my initial purchase. My valuation and technical model is positive on this stock for the month of December, so I would guess the majority of the bounce will happen in the next 30 days. After that, I will have to wait and see because my model doesnt forecast past 30 days.

Long term, I am not sold that Expedia will dominate the travel world, but I think its worth a 30 day trade to assume that everybody who was going to sell has already sold.

Another Microsoft Access Bungle – ‘Query is corrupt’

Another example about how little Microsoft cares about its Microsoft Access product appeared to me today when a client of mine ran into a problem with their Microsoft Access database. Suddenly they started getting ‘Query is corrupt’ messages in the application.

Since I hadn’t made any changes to this application in a long time, I did the usual compact and repair assuming that would fix it. After trying all my usual tricks, I finally went to google where I found the culprit.

According to this support article from Microsoft, this problem was introduced by an office security update that was automatically installed on my clients computer. Comically, the article provides a byzantine workaround to fix the problem:

If you encounter this issue before the fix is available, the recommended workaround is to update the query so that it updates the results of another query, rather than updating a table directly.
For example, if you have a query similar to:
UPDATE Table1 SET Table1.Field1 = “x” WHERE ([Table1].[Field2]=1);
You can create a new query (Query1) defined as:
SELECT * from Table1;
And update your original query to:
UPDATE Query1 SET Query1.Field1 = “x” WHERE ([Query1].[Field2]=1);

I applied that fix to the various spots in my application where I update tables, and that got me through the day. Since someday somebody will stumble across this code and think I am an idiot, I made sure to reference the article in my comments as to why this is coded so ugly.

What amazes me about this is the casual approach Microsoft is taking to fixing the problem. Their plan is to fix it December 10th, almost a month after introducing the problem. My question is, how many small businesses are running mission critical Access apps, and don’t have any Access developers on hand. I know of a few companies in that situation, and I guess once they download this update, they will have to find a workaround.

Curiously Access users on the Office 365 platform will get their fix on November 24th. That is still 2 weeks out, and it may foretell that customers running older versions of Office software will be considered second tier customers.

I have said before that I have concerns about Microsoft’s ongoing commitment to Microsoft Access. This latest development only reaffirms my position that even though there are still many active Microsoft Access applications out there, Microsoft must think they are not important.

Billionaire Philanthropy

The recent 2020 campaign discussions on billionaire taxation are bringing about an interesting discourse, but I wish someone would bring up problems with current philanthropy rules. It seems to me an easy step for someone to take would be to tighten the loopholes of big charitable giving.

This article does a great job discussing The Perils of Billionairre Philanthropy. It seems to me that charitable giving has surreptitiously become primarily a tax avoidance tool for the wealthy. A great stat from this article:

In the early 2000s, households earning $200,000 or more made 30 percent of all charitable deductions. By 2017, this high-earner group accounted for 52 percent of donations. And the total share of charitable deductions from households making over $1 million dollars grew from 12 percent in 1995 to 30 percent in 2015, according to IRS data.

Why the change? A couple reasons in my opinion.

Donation of appreciated stock. A hidden gem of tax avoidance for anybody who has stock that has greatly appreciated. When you donate stock to charity, you get to take the charitable donation credit on the full value of the stock, without taking the capital gain. A couple great examples here. Bill Gates donated $4.6 billion dollars of stock to his foundation in 2017 without paying any capital gains. Lets assume his cost basis on that stock is near zero, and he is in the tax bracket that would pay 20% capital gains tax. By doing this, he was able to avoid paying roughly $920 million in capital gains in 2017. In 2018, Warren Buffet donated 3.6 billion in stock to the Bill and Melinda Gates foundation. Using the same math, I count that as $520 million avoided in capital gains taxes. That’s $1.5 billion in lost taxes in these two examples alone. Yes the money goes to philanthropic ventures, but is that equitable? Now.. it is a pain to donate stock to charity.. which leads me to #2.
The rise in Donor Advised Funds. Donor advised funds are a great tool to give to charity for the wealthy (and upper middle class) to get a tax break. The game here is instead of giving directly to charity every year, every few years to give a lump sum to a Donor advised fund, which is essentially a pool of charitable money that can then be distributed to a different charity at any time. By giving a lump sum, people who do not hit the threshhold for itemizing their taxes can now get a charitable tax break. An Example: Lets say a married couple earns $16000 in taxes, and gave $3000 in charitable gifts in a year. Given the standard deduction is over $20k it makes sense to just take the standard deduction and not take itemized deductions, thus losing your charitable deduction. However, if instead of giving $3k to charity every year, you give $15000 to a Donor advised fund every 5 years. This gives you a $12,000 write-off every 5 years for charitable contributions because you can itemize that lump sum every 5 years. The kicker of course is, if you have appreciated stock, you can contribute your appreciated stock (see #1 above) to the fund to further leverage your contribution and take advantage of tax rules. Then, thoughout the year you dole out your money to your favorite charities from your balance in your Donor Advised Fund. These funds are very easy to set up and use – but how many people can take advantage of them?

It occurred to me that companies that have a 401k must follow strict IRS guidelines to ensure their plan is equitable by ensuring employees participate from all income levels. These charitable donation loopholes have been around for years, so they likely have bipartisan support because they encourage charitable giving. But how hard would it be to look at the above issues to make them equitable? Either change the rules to either cap tax free contributions, or change the rules so people from all income levels can take advantage of these tools.

The Future of Windows

On Wednesday, October 2nd, Microsoft made some interesting announcements regarding new devices and notably, a new version of windows. This Windows Central article gives a great overview of how Windows 10 is being reimagined, and I think it looks intriguing.

Windows 10 in its current state is a big monolithic dinosaur, the accumulation of 10 + editions of the base windows 95 architecture. I can only image the spagetti code that exists inside windows 10, but the fact that every patch that is released for Windows 10 comes with headlines of issues, it appears that it is really getting unmaintainable.

So Microsoft announced Windows 10x, which appears to be a rearchitecture of the operating system to cover a wide variety of devices. Instead of a ‘one windows for all devices’ mentality, it is being modularized to only run the components that make sense for each device. According to the Windows Central article referenced above:

This new edition of Windows 10 is based on Windows Core OS, a modular version of Windows 10 that aims to modernize and componentize the OS for all kinds of device form factors such as HoloLens 2, Surface Hub 2X, and more.

Initially, Windows 10x will only run on the new mobile devices they announced. This stripped down windows 10 assumedly will contain only the bare minimum of functionality needed, which makes sense for new mobile devices. To reduce Windows size and complexity, why not strip out printer support, win32 support and other ancient code needed to run older technology? Windows 10 still has code to run 1990’s era Visual Basic 6 on Windows 10 – is it necessary to port support for that to a new operating system?

I think Microsoft came to the conclusion that Windows 10 in its current state is unmaintainable, and it needs to be rearchitected. I give them alot of credit for thinking ahead and envisioning a better future for Windows. Here is a prediction – I think they will re-brand this before launch, dropping the 10x name and having a name not related to Windows 10 at all.

I have been pretty critical of Microsoft over the years, but I have to give them credit for turning it around. Since Satya Nadella arrived as CEO of Microsoft in 2016, things have changed much more than I expected. They are making smart decisions (mostly..), and really challenging the old ways of doing things. I knew that Nadella would be a huge improvement over the Ballmer administration, and so far I think Microsoft and Nadella have exceeded everybody’s expections.

Dispatch From Croatia

I just returned from a trip to Croatia, a country I (and likely most Americans) know little about. During my two weeks there, I learned alot about the history of Croatia, and got a decent sense for the country. Here are a few random observations I picked up.

I Started in Zagreb, the capital of Croatia. Not really known as a tourist destination, but I was pleasantly surprised with how nice it was. Large pedestrian zone in the center of the old town, nice walks in the city and cafes.

Zagreb and Croatia as a whole was pretty inexpensive, so if you are looking to travel in Europe on a tight budget, Croatia would be a great option for you.

Thoughout the various destinations I visited in Croatia I noticed very few Americans. Thats not to say there were not a lot of tourists – there were – tourism is Croatias leading industry. Most the languages I heard from the tourists were British, German and Slavic, which gave it a nice international feel.

If you visit Croatia, consider skipping any city where the cruise ships visit, unless you want to do the sights early or late. When the Cruise ships dock at Dubrovnik and Split, the streets get flooded during the day with people. We started our trip through the town of Dubrovnik around 8am, and were done by 11am. As we left, the crowds where everywhere:

We got out of there quick. There are plenty of great stops where you don’t have to fight the waves of tourists.

Regarding tourism in Croatia, in talking with a few Croatians, I got the impression they are not happy about being a tourism driven economy. It seemed to me that they felt the fall of communism and the resulting Balkan war broke their country. Industries were privatized, and the high paying jobs associated with those jobs are gone. More than one Croatian lamented the outflow of immigration of Croatians to other countries in search of high paying jobs. Granted most the people I interacted with were in the tourism business, so this anecdotal observation may be slanted, but it felt pretty prevelant.

On our way back from Croatia we stayed over a day in London, primarily because it is hard to get direct flights to Croatia. This was my first visit to London, and found it interesting. I was surprised how dirty it was, walking through the streets there was lots of litter and garbage everywhere. I find most European cities to be pretty kept up so that surprised me. Also was surprised about the number of homeless in London. Not as many as in the states, but more than I recall observing anywhere else in Europe. I am not sure what that indicates, other than the problem is not specific to America.

In summary, Croatia is a great place to visit. If you go, take some time to learn about the history of Croatia, Tito and the fall of communism, and the rise of the independent Yugoslavian states. But also enjoy the scenery.

Renewable Energy Takes Charge

A minor milestone on the renewable energy front – renewable energy sources have taken over market share from coal for the first time:

This Ars Technica article has the full story. I see no reason why this trend won’t continue, as solar prices have been dropping and even battery technology is getting better.

This chart from the US Energy Information Administration also shows an interesting chart – total US energy usage, while up in 2018, has been relatively flat since the mid 2000’s:

https://www.eia.gov/todayinenergy/detail.php?id=39092

Given the rising market share, and the aging of the US population, it seems that petroleum share will have to start shrinking. The primary reason its share has been rising is the dramatic fall in oil prices since 2010. The price of crude oil is now roughly just over half of what it was in between 2010 and 2014. One would think that with the advances in Solar and Wind power lowering the costs of electricity, petroleum prices will have to continue to fall in order to maintain market share.

The General Electric Saga

A lot of good reporting has been done regarding the General Electric (GE) ‘fraud’ accusations, one of the better is which is this Bloomberg article. In summary, the accusations are that GE has under reported its reserves for its long term care business, and will be in need of more cash than would be expected.

My take on all this reminds me of my take on the Boeing problems. In that post I refer to anecdotal evidence that something was amiss with management.

While its been many years since I have worked for a GE company, my take on this is agree with the whistle-blower Harry Markopolos. In many ways it does remind me of the Bernie Madoff story. I don’t think Bernie Madoff started out to be a crook. I think many people bend the rules once they start to get into trouble, then keep bending, then bending until they are so deep they realize it would be financial ruin to come clean, so they just keep putting it off. I recall a client I worked for who had a startup with lots of investor money in the early 2000’s. He had a small company and staffed up to build a big company, and when the market turned the company imploded and exposed some financial misdoings he had committed to try to keep the dream alive.

So this is the parallel I draw with General Electric. I agree with the theory they have been bending the rules with financial reserves, back when they needed money to make their quarterly numbers. GE is full of financial engineers, and their previous CEO Jeff Immelt was very short term (read that bonus) focused. I am sure they thought that business would pick up and they would deal with the issue before it got out of hand, but when Immelt left the years of dirty laundry left behind by him has been exposed. I am in the camp that GE will end up in Chapter 11, especially if the economy continues to soften as GE tries to sell assets. The most accurate analyst on GE has been Stephen Tusa, and he has a price target of $5 on the stock.

General Electric, like Boeing, is a no-touch stock for me. While the new CEO of GE is much more capable than the prior leader, I think the damage has been done and the cupboard is empty. Now its time to just watch this disaster unfold from the sidelines.

Streaming Wars

The battle for the living room has been interesting to watch from an investing perspective. I have been down on Comcast for years, thinking their business model would be severely hampered by the cord cutters eliminating cable. This has been somewhat true as the stock price has been flattish over the last 5 years:

The one stock I have been kicking myself for not owning is Netflix – which has had an incredible run over the last 5 years:

Earlier this month, Netflix reported slowing growth, and the stock got hammered – down from 360’ish to 310’ish. Recent earnings showing a slowing of subscriber growth, and fears of the Disney streaming service and Apple streaming service spooked investors.

The way I see it – the market is wrong on this one. Granted Netflix’s valuation is awfully high, but even with their subscriber growth not meeting projections, it was still decent domestically and great internationally. Interestingly their growth in the previous year’s quarter also missed expectations, and it bounced back nicely the following quarter. The word on the street was that areas that had price increases fared the worst. I am willing to bet that subscribers to Netflix are not that price sensitive. Amazon raised the price on Amazon Prime and nobody blinked – I think Netflix has more levers they can pull to raise revenue if they feel the need.

Regarding the increase in competition – I think the market is overreacting on this one too. I agree Disney is going to be a formidable competitor (and luckily I have been long Disney for awhile), but I hardly think Netflix will be the one hurt the most by this. Netflix is an establishment in most households – and I think it has the strongest network effect of all streaming companies. I think the big losers will be the 2nd tier streaming/content services – things like CBS Interactive, maybe Showtime, HBO etc. If people want to cut down their expenses on monthly TV subscriptions, I think Netflix will be low on the list. Regarding Apple’s offering – I am willing to bet that it will be underwhelming and not meet expectations. I still am in the camp that Apple is struggling to execute on its new initiatives, so I think the market is overly concerned about this one.

I initiated a small position in Netflix a few months ago when I saw the stock price weaken on these competition concerns. I prefer to invest in companies with CEO’s that consistently make the right moves, and Reed Hastings meets that criteria. So even though I am underwater on my holdings of Netflix, I am definitely not selling, and considering doubling down on this one – I am just waiting for the stock market and price to stabilize then will take a closer look.

Windows 10 Updates And Microsoft Access

I got a note from a client who runs a medium size Microsoft Access application, and recently they have been getting ‘Unrecognized database format’ errors on multiple client machines. This is a standard Access app they are running, with the client access database linked to a database of Access tables on the server. Microsoft Access is notoriously finnicky when it comes to network errors, and so my first assumption was that my clients networking setup had issues.

But I did a little poking around as it seemed odd that it would start cropping up on multiple machines, and I found this post pointing to what looks like a problem with an incompatibility with Microsoft Access and a recent update to Windows 10. From the looks of this article, this problem as impacted a large number of Access users, but has remained uncorrected for over a year. This article does show a workaround:

I wonder how many Access users would feel comfortable editing the registry on their machine (and their server), and even then it sounds iffy. Note that staying with Windows 10 build 1709 works, but given all the tightening of security in todays corporate world, that’s likely not an option for many users.

The fact that this problem has gone uncorrected for so long underscores to me that Microsoft Access will be deprecated or made functionally useless in the near future by Microsoft. Either explicitly, or through other ‘breaks’ that happen as Windows and/or Office moves forward. I understand why Microsoft is uncomfortable with Access. It’s foundation language, Visual Basic for Applications is outdated, and the native Access database format is underpowered when compared with SQL Server. When Microsoft released a free version of Microsoft SQL Server for small databases, this was the point where all hope for Access was lost. Microsoft is correct – there are better platforms for software these days, but I think they underestimate the number of business critical applications still run on Microsoft Access.

I am a huge fan of Access – it was ahead of its time in the 1990’s for quickly developing desktop apps. Many businesses, small and large, quickly built little Access applications to automate a business process. Often these applications were built under the radar of IT and without a budget. I know of many such Access Apps that have been around over 15 years, still providing value, yet there is no budget to rewrite them.

So unfortunately, Access users beware. Microsoft’s interest in Access is waning, and as they compete for Enterprise business and cloud applications, Microsoft Access may not have a seat at the table.

The Chase For High Yield

Every once in a while I get a notice of a bond offering from my broker for Ford Motor Credit. As I am always on the lookout for higher yields, I always pause and give this some thought.

With a 7 year CD yielding around 2.0%, my first thought is sure – Ford Motor seems pretty safe, maybe I should go after a higher yield. But after thinking about it a bit more, I always back off.

A couple problems keep creeping back in. First, I think the next market downturn will be initiated by some sort of credit breakdown, whether it be corporate borrowing, consumer borrowing, or sovereign borrowings – all at historically high levels. There is too much debt out there and so I am leery of low rated credit getting rated even lower. If this happens, I either want to be in high quality corporates, or government bonds. I am not sure I can consider Ford Motor a high quality corporation. The stock is lower now that it was 20 years ago, and has a terrible Debt/Free Cash Flow ratio of 6.77.

The second thought I have is the future of car manufacturers. The automobile industry is in the midst of a huge transformation and will likely look quite different in the next few years. From the switch to primarily gas fueled vehicles to electrics, to the concept of ride share replacing car ownership, I think the automobile business model will change drastically.

This disruption will lead to winners and losers. Will the ride share companies running autonomous vehicles be the winners? Will Tesla be the next big car manufacturer? All these questions nag at me as I look over the yield of these Ford Motor Credit bonds.

Investing in high yield bonds is always difficult. Every high yield bond/corporation has its fault, thus the risk premium. In many ways its similar to investing in stocks. It requires an investment thesis and opinion about the future. And for me, a low rated bond focused on consumer credit and the car industry looks like a risk that is too big to bear.

VIRTUAL DAN

Notes from my travels around the internet