March Round Table: March Madness

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During the March 2013 session of the Round Table, our noble knights (and fair damsel Anne Manning) elected to close out (“sell”) the positions in Adobe Systems (ADBE).

The annualized relative return achieved on the selections of ADBE by Anne Manning and Ken Kavula was +16.5% and +14.5% respectively. Huzzah and thanks, Anne.

Bank of America (BAC) was also batted about. The fundamentals have been a wreck and they’re still impacted by the Great Recession. Book value was hammered and is still recovering — a condition quite widespread amongst all banks. Return-on-equity (ROE) has been staggered and perhaps somewhat permanently altered. In the case of BAC, a quick sensitivity analysis on two different thresholds for projected ROE illustrates how muddy and choppy the waters still are for BAC. Hugh also noted the cobbled-together nature of many of these banks since 2008 during the crisis and that spinoffs and restructurings probably hold fairly promising — and quite confusing — potential.

What levels of profitability (ROE) will banks like BAC achieve going forward. We know that 15-20% was commonplace back in 2000-2005 … and that ROE levels have been restored to a fraction of their historical levels. As shown here, the analyst consensus for BAC is currently approximately 5%, but likely increasing. If it were to rebound to 10% (still far below 15-20% levels) … the return forecast (PAR) is 18% versus the paltry level shown on the dashboard. This is part of what Hugh has been thinking for a few years since his famous, “I want to own a bank.”

Where do you think ROE levels for banks in general are headed?

In celebration of William Shatner’s 82nd birthday, Ken and Cy added Priceline (PCLN) to the Round Table tracking portfolio. Continuing with the theme of mayhem and madness, Hugh and Mark also agreed on a selection (a condition that we’ve rarely seen amongst all the knights over the last three years) and presented Intel (INTC). Hugh shared some thoughts on diving beneath the surface of customary analysis to take a look at inventory trends.

If you’d like to hear Hugh expound on this theme, let us know and we’ll schedule a webcast to share legendary tales of companies like Lucent, SafeSkin and Cisco Systems.

The road ahead for Intel is not without a speed bump or two as the transition from PCs to other devices and hardware continues. The company always has been and likely will be, a growth-cyclical, and it will likely remain that way with a long-term growth trend in the 6-8% range for the foreseeable.

But it’s a clear leader in its industry with solid margins. As shown here, Value Line has the long-term low total return forecast at 17% — not too shabby.

The audience closed the session by voting for Priceline (PCLN) over Intel in a clear birthday cake tribute to Captain Kirk — and price negotiators everywhere.

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