Deconstructing Sony: Some-of-the-Parts Have Value

OK, so this is a company I really, really would love to love.  I grew up with their products and thought they were great.  But things haven't gone well there.  

I've been short this stock for a while, but without too much research.  It was just a short on Japan in general and Sony's (SNE) total disregard for shareholders (for example, their CEOs have been quoted as saying that they will never exit the TV business because the engineers are very proud of their work!  What the heck kind of management would say something like that?!) and the typical, slow-moving, no-sense-of-urgency in general in corporate Japan.

Also, I kept walking around trying to think of U.S. television manufacturers and wondered if Japan isn't going through the same phase that the U.S. went through (Japan did to U.S. manufacturing what Korea and China are doing to Japan; only Japan refuses to admit it is happening).

Anyway, enough of that.   The stock is getting mighty cheap now so maybe it's not such a safe short.  Also, I see that SNE is starting to turn up in value screens as it is trading well below BPS and some have said it is trading cheap ex-cash and investments on the balance sheet (but this is assets in the consolidated Sony Financial Holdings, so you can't look at it that way).

So first of all, since it is cheap (and has been cheap) on a P/B basis, let's take a look at the long term trend in book value per share, ROE (I will just use return on beginning equity; EPS / BPS at the prior year-end) and see how the stock traded against that over the years to see if Sony even merits trading at BPS (it would have to have a 10% or more ROE to merit P/B > 1, right?).

It's a Sony

This is a chart of SNE's stock (in yen) versus it's book value per share since 1991.  The symmetry is nice, but we don't really want symmetry in a stock price.   Sure enough, the stock looks cheap here dipping far below book value for the second time since 1991 (this is just an annual chart so maybe it's not the second time, but...).

Here is a table of some key figures for SNE since 1991. 

Digital Nightmare

Wow, so this is pretty awful.  In the past 21 years,  Sony has only generated a doubt digit ROE *twice*.  Just twice.  OK, so let's be generous and throw in 1997 as 9.88% rounds to 10%.  But that's still just three years out of twenty one.

From this table, you can also see that SNE has not grown book value at all since 1991!  Of course, that's hard to do with such a low ROE.     OK, so they paid dividends.  But dividends only averaged around 1.1% on book value for the past 21 years, so a shareholder would have only earned around 1.2%/year over 21 years!  (That's not a typo; the BPS did increase 0.1%/year so 1.1% dividend to book + 0.1% = 1.2%/year return)

Value Destruction
Over different time periods, book value per share growth was as follows:

                                      BPS growth
Since 1991:                   +0.1%/year
Past five years:              -9.7%/year
Past ten years:               -2.4%/year

So SNE managed to lose -10%/year in book per share over the past five years and -2.4%/year in the past ten years.  That's really stunning given that's it's not even a bank, investment bank or in the housing industry. 

So judging from that, SNE stock certainly doesn't look worth book value per share.  Why would it be if they haven't created value in 21 years?

Let's take a look at ROE over that time.

ROE in the past 21 years has averaged 1.74%/year.  I just used return on beginning equity since SNE doesn't include ROE in their financial summary and I just pulled these numbers from there.  (It's very telling when management doesn't display ROE anywhere on the annual report!  It means they aren't even paying attention to it).

But it's been a rough couple of years...
OK, so we've had a near depression, spike in the yen and a huge earthquake/tsunami and other exogenous events.  Perfect storm after perfect storm.  Fine.  Let's then just look at the average ROE through March 2008; the year-ended March 2008 was a record year for SNE at the peak of the global economic bubble.

So if you look at the ROE over the years and stop at 2008, the average is still only 4%/year.   Is a business that can earn only 4% ROE worth book?  I don't know.  I wouldn't be interested in such a business.

Why is Sony So Cheap?
I hear this question sometimes, but I think the question is the reverse: Why was SNE so expensive?!  With this horrible record of ROE and book value growth, SNE stock still traded at an average of 1.9x book value for the past 21 years.  That's almost 2x book for something that returned 1.7% on equity over the years.    To me, the price is more reasonable now than what it has been trading at before, even BEFORE the 3/11 earthquake, yen spike to 80 yen/dollar, financial crisis / Lehman shock and all of that.

Sum-of-the-Parts
I tried to put together long term financials for SNE but it was a nightmare trying to put together a history of segment data revenues and earnings.  They seem to keep rejiggering the segments so it's a pain to get a continuous history of segments.  The Music segment used to be the Music segment and then Sony Music turned into Sony BMG, which was booked as an equity method holding and the domestic music business was put into "Other", and then Sony BMG bought out the other 50% it didn't own so it became a wholly owned subsidiary again so it's back to being the Music segment (and domestic music business is out of "Other" and back into "Music").  And then there was all that shifting around of games, consumer products etc... 

So I figured, forget it.  I will clump all the legacy SNE into "other" and then get a value for the other more discrete parts:  The movie business, the music business, and the financial business (at least these segments have been stable for the past five years).

It turns out that over the past ten years, these three segments pretty much made all the profits and the rest of SNE didn't make any money at all (or very little).

Since 2000, SNE earned a total of 1.87 trillion yen in operating earnings.    Of that, the above three segments earned:

                                   Operating earnings
Segment                     for past 10 years
Pictures:                     504 billion
Music:                        236 billion
Financial Services:      871 billion
Total:                       1,611 billion

Together, that's 1.6 trillion yen in operating earnings from these three segments.  Actually, the Music segment should be higher than that because at one point, part of the Music business was booked as equity method  income (Sony/BMG) and not reported as a separate segment (so it's not included in the above "Music").  The music business outside of Sony/BMG (domestic music etc...) was booked in the "other" segment which I didn't include in the above.

You can see that Financial Services alone earned more than half the operating profits at SNE over the past decade.

What, you thought SNE was a TV and game console manufacturer?

So let's take a look at the sum-of-the-parts of SNE, as maybe some-of-the-parts have some value (not that Japanese management would be interested in realizing that value in any way)

Sony Financial Holdings (SFH)
This one is easy as SFH is a listed stock.  We can let Mr. Market tell us what this is worth.  SNE owns 60% (261,000,000shares) of SFH.  It is trading at around 1,162 yen/share so it's worth 303 billion yen now.  

SFH U.S. GAAP Results

Just as a sanity check, here are the SFH results as reported in SNE's 20-F filings (2012 from the earnings announcement; no 20-F yet).

According to this, SFH can be worth up to book value as it does have a long term ROE of 10%.  It's not that consistent, though, and it seems the good years are based on profits on gains in convertible bonds when the Japanese stock market is strong. 

If SFH is worth GAAP book value, then SFH may be worth 500 billion yen instead of 300 billion yen based on the SFH stock price traded in Japan.   But then many U.S. life insurance companies are trading below book value too, so that assumption might not work in this environment. 

(Note:  SFH is consolidated so the above table results are for all of SFH.  Again, this is U.S. GAAP based so differs from numbers reported on the SFH annual report (based on Japanese GAAP).  The difference is beyond the scope of this single blog post...).   The minority interest is deducted below the line; Sony actually only has 60% of the above table figures.

• Advice to SNE management:  The financial statements are horribly complicated due to the consolidation of SFH; it's a nightmare to read!  Sure, there is a separate balance sheet, income statement and cash flow statement if you dig into the 20-F in the back, but it makes all the other figures virtually meaningless.  Either spin-off SFH to simplify it, or take a look at GE's annual report and see how they separated out GE's industrial business from GE Capital so it's easy to read.  Given that SFH earned more than half of the operating earnings at SNE over the past decade, it's not too small to ignore and put in the footnotes anymore.

Pictures
I wouldn't know how to value a movie business, but some googling around gave me some hints.  One of them is that Dreamworks LLC (not the animation one, but the live action one run by Spielberg) was purchased by Paramount for 1x revenues.  Also, the NBC/Universal deal was valued at 10x EV/EBITDA (I don't know if that includes NBC too or was just the movie side, but a sum-of-the-parts analysis of VIA or some other company sited NBC/Universal's 10x EV/EBITDA to value a movie studio).  Also, another analysis used 12x operating earnings to value the film group of NBC/Universal.

So here are my reference points:  10x EV/EBITDA, 12x operating earnings and 1x revenues. 

(I won't use Pixar or Lions Gate as they seem to be very different (and expensive)).

Since the movie business is a hit/miss business, I'll use the past five years average for sales, operating earnings and OIBDA:

                                          Operating
                     Sales            income            D&A        OIBDA
2008             858                59                     9                68   
2009             718                30                     8                38
2010             705                43                     8                51
2011             600                39                     8                48
2012             658                34                     8                42
Average:      708                41                     8                 49
           
 (actually, the D&A of this segment wasn't in the earnings release for 2012 so I just used 8 as it seems pretty stable over the years).

So according to the above, Sony's picture business can be worth:

Method                        Value
1x revenues:                708 billion yen
10x EBITDA:              490 billion yen  (I used OIBDA)
12x op income:            492 billion yen

So the movie business is worth somewhere around 500 - 700 billion yen.

Music
The music segment, too, is hard to value.  There aren't a lot of comparables.  I think EMI was a disaster so I won't use that as a datapoint.   I think the Sony-BMG deal valuation is obviously a good starting point as it's the same business (even though the current music segment includes music business other than Sony-BMG; the domestic, Japanese music business etc...).

The Sony-BMG deal done in 2008 was priced at 4.2x OIBDA.  The other datapoint is Warner Music Group that was acquired in January 2011. The deal was valued at 7.7x EV/OIBDA (adjusted for one-time charges/costs). 

So the music business is worth anywhere between 4-8x EV/OIBDA.

Again, I will use a five year average since this business is also hit-miss driven:

                                       Operating        
                    Sales           income         D&A     OIBDA
2008            229             35                  7              42
2009            387             28                  10            38
2010            523             37                  13            50
2011            471             39                  12            51
2012            443             37                  12            49
Average:     411             35                   11           46

So according to the above, the music business is worth:

Method                    Value
4x EV/OIBDA         184 billion yen
8x EV/OIBDA         368 billion yen


Value So Far
So far here is what we have for some of the parts of SNE:

                                                         Low                   High
Sony Financial Holdings:                300 billion         300 billion
Pictures:                                           500 billion         700 billion
Music:                                              200 billion         350 billion
                                                      1,000 billion      1,350 billion


So these three segments together are worth anywhere from 1.0 - 1.35 trillion yen.

There is 719 billion yen of cash sitting on the balance sheet (excluding SFH), but not all of that is going to be available.   There is also 176 billion yen in "investments and advances", which is where the equity holdings are booked.  Historically, this held Sony-Ericsson and the LCD joint venture and maybe some others, but they haven't been profitable so I won't give it any value here (until I otherwise learn what value it may actually have).

Long term-debt is 749 billion yen, short-term debt is 400 billion and "accrued pension and severence cost" is 294 billion yen, so that's 1.4 trillion in total debt and accrued pension and severence cost.  There is non-current "other liability" too but I think that is tax related and may be offset by tax assets, so I will leave that out  (I deduct short term debt here too because it seems like that is often current portion of long term debt).

So, we have total asset value of the three segments we looked earlier of 1.0 - 1.35 trillion, cash (excluding financial segment) of 719 billion yen and 1.4 trillion of total debt and other liabilities (not total liabilities; just the accrued pension and severence).

If we are generous, like many valuation models are out there, we can give full value to the cash.  In that case, the "stub" value of the rest of Sony (games, TV, audio/visual, computers etc...) would be:

Three segments value:     1.2 trillion (mid-point of 1-1.35 trillion yen range)
Cash:                                719 billion yen
Total:                               1.9 trillion yen
less total debt and liab:    1.4 trillion yen
                                        500 billion yen

With around 1 billion shares outstanding, that comes to 500 yen/share.  So the above three profitable business plus cash less debt equals 500 yen/share.

With Sony stock trading at around 1,100 yen/share, the value of the rest of the businesses is 600 yen/share.

Is the rest of Sony worth 600 yen/share?  Remember, excluding the three segments (Sony Financial, Pictures and Music), Sony hasn't made any operating profits over the past ten years.

Also, remember this is being generous as we are giving full credit to the cash even though the businesses need some cash to run; it can't all be distributed out in a breakup. Some cash will go to the various businesses.



What About Spinning Off SFH?
So what about just spinning off SFH?  It's already listed so a spinoff shouldn't be too hard to pull off.  Since SFH earned half of the operating profits in the past decade, the SFH-less Sony would just look horrible.  I'm not even sure it can survive.  

Take a look at the table below.  I just put together some figures from the 20-F filings that show Sony excluding the Financial segment.

It's pretty ugly.

Sony Figures Excluding Financial Segment

How much would you pay for a business that has earned a -7.5% ROE over the past five years, -2.2% over the past ten and -1.8% since 2001?

And remember, this *includes* the profitable Pictures and Music segment.

Now you can sort of understand why Sony wouldn't want to spin off SFH.  What is left over afterward may not survive very long.

On the other hand, maybe the profitable SFH allowed SNE the luxury to do nothing over the years and have no sense of urgency or crisis.  If there wasn't SFH income to soften the income statement, maybe they would have more of a sense of urgency and do something drastic.

Obviously, since the movie and music segments too are profitable, selling those would only make SNE look much worse.  No wonder why they are in no rush to sell those businesses; they need the profits from the three good businesses to subsidize their bad businesses.

Total Liquidation
Judging from the above "stub" calculation, if you assume that the rest of SNE (other than the SFH, Pictures and Music segments) is worth nothing and you just sell everything and pay back short-term and long-term debt and the pension and accrued severence costs, you would be left with 500 yen per share; less than HALF of what SNE is trading at now.

But that assumes that you can shut down the rest of SNE at no cost, but that's not going to be true.  It would cost money to lay off workers (severence), shut factories, and there is no telling what the 1 trillion+ in product inventory is going to be worth.  I assume generally that current assets and liabilities fund each other (recievables versus payables, inventory versus trade payables etc...).

But in a liquidation, that is probably not going to be the case.

So at this point, I don't see any clear value for SNE as a whole, even though SOME of the parts or even many of the parts have great value.

Conclusion
So this is just a quick look, even though it took me a lot of time to go back and forth through all of these filings to figure some stuff out.  

I see that there is some great value here, but then there is a lot of debt too. 

It sort of does look hopeless to me, but I have no real view on the other parts of SNE's business.  I have no idea if Playstation 4 is going to come out and knock the X-box out of the game (like how Playstation put Sega out of business).  I have no idea if SNE's mobile phone business will do well against Apple.  I don't have a view on digital cameras, camcorders and things like that as I see it as increasingly commoditized.  This is the same with TV's and other AV products.

I get the sense that the Koreans are catching up much more quickly than the Japanese anticipated, and there really doesn't seem to be an answer for them.

Their computer business too, seems iffy to me. What is their edge? Can they do better than HP and Dell? How are they going to compete with Apple?

I would not be comfortable long this stock; there is just no clarity for me in how SNE can generate value here.  As I said above, just by looking at their ROE history, it's just not worth book.

Risk of Being Short
On the other hand, there is a lot of risk being short this down here.  One thing is that investors in Japan may look at book value as a valuation measure (I've seen it mentioned that way; that book value is fair value).  So positive sentiment in the Japanese stock market can take this stock up.

Also, foreign investors tend to buy SNE as a blue chip, core holding like IBM or Coke (well, actually I'm not sure but it sure does look like there are a lot of foreign owners). 

SNE has gotten hurt by the rapid rise in the yen, so a collapse in the yen that so many are calling for would lead to a big rally in all exporters in Japan regardless of 'real' future prospects.

And as we all know, in this world of technology, you just never know.  There was a time when people thought Sun Microsystems was dead (just before the internet boom and it made tons of money on that).  Of course, there is the Apple story and some others.

So a hit product or two can really change things but that's not something we can predict.

Anyway, at this point I think I will stay short this one for now.

Einhorn's Macro Trades

We know that Einhorn has taken a view on some sovereign credit, Japanese yen and gold etc.  So I thought I'd take a quick look at his macro positions.

First of all, for reference, at the end of the first quarter total investments were $1.18 billion and shareholders' equity was $869 million.

Positions
This is not all of the macro positions, but just some of the larger ones:

Long Position:
   Commodities:  $104 million

Einhorn has said that he wants to keep 10% of funds invested in gold as a tail hedge, so I guess this $104 million is all gold.  He also owns gold stocks which would be in the equity portfolio and may own some GLD which may be booked in the equity portfolio.

Short Position: 
   Non-U.S. sovereign:  $150 million

Interest rate options:  $3 billion notional amount

Credit default swaps:
   Sovereign debt:  $281 million notional
   Corporate debt:  $287 million notional

Put Options:  $260 million notional amount (Japanese yen?)

Futures:         $335 million  (doesn't say if it's long or short or what the underlying is; probably interest rate instrument given interest rate exposure table below)

For the above positions, I would guess that the sovereign shorts and interest rate options relate to the Japan trade and may include others.

Foreign Currency Risk
GLRE has exposure to foreign exchange, but the big exposure is the Japanese yen (JPY).  In the table in the 10Q that shows FX risk, it shows that a 10% increase in the U.S. dollar against the JPY would lead to a $40 million gain, and a 10% decrease would lead to a $15 million loss.  The asymmetry is due to the position being held as a put option.

So this is a pretty large position.  There is a smaller position in the Euro, but it seems the JPY is the big FX trade.

Interest Rate Risk
The interest rate risk table shows what the exposure is on a 100 basis point move in interest rates due to holdings in corporate bonds, sovereign bonds, interest rate options and futures, credit default swaps etc.

Below is the gain on a 100 basis point increase in interest rates (this isn't the whole table; I just picked large items, and it's pretty symmetrical so I didn't put in what happens on a 100 basis point decrease in rates).

Debt:                            $11 million
Interest rate options:     $1.5 million
Futures:                        $15 million
Net:                              $27 million


So that's a snapshot of exposures that GLRE has on the non-equity portfolio;  a sizable position in gold, Japanese yen puts, short sovereigns and interest rate futures and long some credit default swaps on corporates and sovereigns.


How Have These Trades Done in the Past?
GLRE breaks out gains and losses recognized in their derivatives portfolio so I looked at the past five years (they didn't disclose details further back) to see if they have been making money on these trades or not.

Here are some figures I pulled out of past 10K's:

             gain (loss) on derivs:                Total gains recognized in income
             Equity:                                      Shareholders' equity of GLRE
             Total Inv:                                  Total investments of GLRE
             Gain/loss on equity swaps:       Derivs gain/loss on equity total return swaps
             % equity:                                   derivatives gain/loss as a percent of shareholders' equity
             % invest:                                   derivatives gain/loss as a percent of total investments
             derivs gain excl equity swaps:  Total derivs gain/loss without equity swaps
             % equity:                                    the above as a percentage of shareholders' equity
             % invest:                                    the avove as a percentage of total investments
             Investment return:                     Return on investment portfolio at GLRE

So it looks like these derivatives positions have cost GLRE some money over the years.  Equity total return swaps are included in here, but these may be part of the equity portfolio so it may not be a good idea to include.  They may be structured to offset positions in the equity book etc.   It doesn't reflect, I don't think, Einhorn's macro views.  That's why I created a column where I net out the equity swap gains and losses to get a more 'pure' derivatives gain or loss.

According to that, GLRE has usually spent around 1.6% per year of the investment portfolio on these macro trades.  Of course, the temptation is to think that if Einhorn didn't do these trades, then GLRE would have done 1.6%/year better in their investment portfolio.

But I would not look at it like that.  If these macro, tail hedges were not on, then Einhorn very well may have had less long equities or otherwise reduce risk (and return) elsewhere in the portfolio.  So you can't really look at it that way.   (You would be slightly better off without homeowner's insurance too, but would you really live in a house you own if it wasn't insured?)

Also, this derivatives gain/loss doesn't include their large gold position which is held as a commodity long position, not a derivatives position  (Also, gold stocks and gold ETF's would be in the equity portfolio). 

So just looking at the derivatives gain and loss like this doesn't tell the whole picture.
Judging from the above table,  I am sort of surprised that there wasn't some sort of gain during the financial crisis in 2008-2009.  But overall, it seems like a manageable expense to keep these trades on as they may eventually work out.  Even if not, the overall investment performance with these derivatives losses has been pretty good in an awful environment.

Anyway, it looks like they have some sizeable positions that can really benefit from some chaos in the market.  A $3 billion notional amount interest rate position is large; almost 3x the total investment portfolio.  But since this is in the form of interest rate options, the downside risk is limited so this won't lead to any unpleasant surprises.

The JPY position, too, is a put option so can't cause big damage.  The worst that can happen is the option expires worthless.

Additive to Returns
What's important to remember is that these positions are additive to total returns and don't require a whole lot of capital.  A lot of these positions can simply be supported by the assets held in the investment portfolio. 

Despite these large 'bets', GLRE maitains a fully invested long/short equity portfolio at the same time.  As the above shows, even when the trades don't work out, they don't lead to large losses, but small losses sort of like the cost of insurance.  Einhorn is managing this part of the portfolio, presumably, like an insurance plan (small constant losses are OK to protect the portfolio and for a chance at outsized gains when he is right).

The other thing to remember is that these macro trades cost very little for GLRE and he gives up nothing on the long - short equity side. 

Time and again, I hear of and talk to people who try to trade in and out of leveraged interest rate and FX ETF's to try to make money (and nobody does, of course).  But these folks usually have to sell their Apple stock to buy their 3x leverage interest rate ETF.  Or maybe they sell their MCD stock or whatever.

Institutional Advantage Over Retail Investors
So for most individual investors, these macro plays turn into either-or situations; either they maintain a stock portfolio and stay away from the macro stuff, or they sell some of their stocks to put on some macro plays via various ETFs.

What they don't realize is that guys like Einhorn don't have to do that at all.  They can still stay fully invested in their best stock ideas, and oh, if they see a good macro trade, they can put on sizable interest rate and foreign exchange positions.

This, by the way, is why people like Soros was able to make so much money over the years.  In all those years he made huge amounts of money on macro bets, he typically had an equity portfolio supporting all of that, and in bull markets it funded many of the macro bets (or subsidized them in dry periods).

Individual investors typically don't have that advantage, so if they don't like the market, sell their stock and buy inverse bond ETFs, they are screwed when they are wrong.  They might get a double whammy; they lose money on the ETF trade, and most likely the stock they sold went up!  (this scenario is most likely because it's often at bear market bottoms where individuals decide to sell their stocks and buy an inverse S&P fund; they sell their stock and go short at precisely the wrong moment!)

Not Einhorn.  If he is wrong, he still has his equity porfolio and he can manage his macro exposure without touching it.

That's a big difference and is really the key to why some of these hedge funds can make such great returns over long periods while individual investors that try to become a George Soros often fail; it's almost impossible to pull off without this advantage.

Greenlight Re Investor Meeting Notes 2012

I attended this event today and here are some notes.  As usual, this is not intended to be a comprehensive summary at all so I won't get into every detail.  Also, there may be mistakes.  Reading through the many Berkshire Hathaway annual meeting notes, we know that many people can hear the same thing and interpret it differently so keep that in mind.

There was a slide presentation in the beginning (so I'm just jotting down some key points, and sometimes copying down the whole slide):

Who We Are
Some of the bullet points are:

• "dual-engine" reinsurance and investment strategy is fundamentally different (make money on both insurance and investment sides of the business)
• Seek to earn economic profit on every reinsurance contract and every investment in all market conditions
• Compensation structure focuses on economics of business (paid based on underwriting profits, not premium growth etc...)
• Measure progress by growth in fully diluted adjusted book value per share over the long term

Our Approach

• Employs "symmetric" and complementary reinsurance and investment strategies
• Client-centric underwriting approach to develop long term relationships
• Portfolio is heavily weighted towards frequency business (95% frequency in 2011)
• Selective in severity transactions when priced right
• Seek to partner with specialists

Symmetric Approach
There are similarities in how both the insurance side and investment sides are run.  They both focus on capital preservation / downside risk on deal-by-deal basis, concentrate on best investments (or deals), focus on economics, bottom-up approach, portfolio is sum total of good opportunities and they both have small team of "highly skilled generalists".

The above seeks to "deliver superior long-term growth in book value".

Growth in Book Value per Share Over the Long Term
Book value per share has grown 11.7%/year since 2004.

How Do We Compare?
GLRE has both much lower net earned premium / surplus and invested assets / surplus than others, but has managed to compound book value at 11.7%/year.


Combined Ratio Comparison

 
Hedges (Bart Hedges, the CEO of GLRE) said that the competitors exclude corporate overhead from their combined ratio calculations, but GLRE includes it.  If GLRE excluded corporate overhead, the combined ratios of GLRE would be 2% lower.

He said that their low leverage business made them underperform in the good years but spared them in the bad year of 2011 (with the Japan earthquake/tsunami, New Zealand earthquake etc.)


Motor Liability Commercial
Hedges talked about their mistake in Motor Liability Commercial, but that the contracts are rolling off and as the losses works it's way through, there will be less of an impact going forward.



Areas of Focus
Hedges talked about some opportunities in areas they are focusing on:

• Florida homeowners
• Employer Stop Loss (health)
• Small Account Workers Comp, General Liability and Commercial Auto
• Property Catastrophe Retro

Takeaways
So summing up,

• Measures results based on growth in fully diluted adjusted BPS
• Frequency oriented strategy has preserved capital in volatile times
• Client-centric underwriting model has gained market recognition
• Underwriting portfolio is concentrated in highest conviction ideas
• Well positioned for growth when market conditions improve

Market Conditions
Persistent low interest rate environment reduces investment income putting more pressure on underwriting earnings and increases interest for high yielding catastrophe bonds, side cars etc. (which is not good for insurance pricing).

Economic uncertainties reduces demand for insurance and inflationary environment has leveraged impact on excess layers and long duration liabilities

Aging U.S. population and increasing obesity trends leads to higher utilization (health care) and higher costs per visit and slower return to work (workers comp?).


With some comments on opportunities going forward, Hedges passes the podium to David Einhorn:

Investment Approach

• Value Long/short investments with macro hedges
• Focus on capital preservation
• Average gross long exposure of 90% long and 53% short since formation of GLRE
• Annualized return of 9.6%/year since formation of GLRE

Investment returns of 9.6%/year compares to 5.3% for the S&P 500 index, 6.6% for the Russell 200 and 7.5% for the Barclays Aggregate Bond Index.

He showed a table showing attractive Sharpe Ratio and low correlations to the market (0.58 correlation to S&P 500 index and 0.14 to bond index) and some other metrics (used by hedge funds).

Current Investment Environment

• U.S. economy and corporate earnings continue to grow
• Quantitative easing on hold for now; commodity prices trending lower
• Wide disparity of equity valuations (Einhorn notes that there are a lot of cheap stocks and expensive stocks so that is an opportunity)
• European problems remain unsolved
• Slowdown in China
• Possible Japan sentiment change  (Einhorn thinks Japan has passed the point of no return (in terms of too much government debt)

Current Investment Portfolio

• Currently 96% long and 57% short (now more net long as they added to longs during recent downturn)
• Largest holdings Apple, Arkema, GM (he said is a cheap stock), gold and Seagate.  He also mentioned MSFT, Dell, gold stocks and puts on the Japanese yen
• Longs included cash-rich large cap tech stocks
• Shorts include misunderstood cyclicals and overpriced deteriorating businesses
• overlaying macro hedges due to risky fiscal and monetary policies

Then CFO Tim Courtis talked about the business in general.

Calculation of Float
He noted that many companies calculate float differently, but that GLRE uses a simple measure.  He adds up total investments (including cash, restricted cash, due to prime brokers and many items not in the actual "total investments") and subtracts adjusted shareholders' equity and he calls that "float".

Appearance of Debt
He also talked about the fact that data vendors like Yahoo Finance show debt on GLRE's balance sheet and he gets asked about it often.  He pointed out that GLRE has never issued debt as part of the capital structure.

The 'debt' that shows up is actually cash collateral put up to support a letter of credit.  Since the financial crisis, regulations have made it harder to offer letters of credit; they need cash collateral.  So GLRE puts up cash out of a margin account to support the letter of credit. So net-net, it's not actually debt outstanding; margin borrowing is offset by cash that sits in a custody account to support the LOC.

How Reinsurance Companies Make Money
Courtis did a quick tutorial on how reinsurance companies make money.  I think most readers understand this, but it was well-presented so here goes:

ROE = Underwriting Return + Investment Return

ROE = (P/E) * (100% - CR) + (IA/E) * (IR)

   where:   P =      Earned premium
                 E =     Equity
                 CR =  Combined Ratio
                 IA =   Invested Assets
                 IR =   Invested Return

Courtis talked about the two types of leverage:  Underwriting leverage and investment leverage (float).

Return on Equity Breakdown

This is the breakdown of the change in fully diluted adjusted book value per share:

To illustrate the power of the dual engine model, Courtis showed two tables (which I hastily reproduced here):

The numbers in the top row are the combined ratios and the column to the left show investment returns.

So assuming the same ratios as the year 2011, earned premiums at 47% of capital and invested assets at 134% of capital, the ROE would be the following depending on various combined ratio and investment returns:

                                    Earned premiums  = 47% of capital
                                    Invested assets = 134% of capital

So with a combined ratio of 100% and a 15% investment return, GLRE would increase book value by 20%.  If they had a 120% combined ratio but earned 15% on their investments, they would still increase book by 11%.

Courtis was careful to say this is not a forecast or estimate, but just illustrative, he put up a table that showed what happens if earned premiums were 50% of capital and invested assets increased to 175% of capital.  In that case, the ROE, or change in book values under various investment returns and combined ratios would be:

                                  Earned premiums = 50% of capital
                                  Invested assets = 175% of capital

So with a 100% combined ratio and a 15% return on the investment portfolio, GLRE would grow book 26%.  In a great year if combined ratio was 90% and the investments returned 20%, they can grow book 40%.

This is the power of a dual engine strategy.

He (or someone) mentioned that the capital is not fully deployed.  When market conditions improve, then GLRE can do pretty well.

Fully Diluted Adjusted Book Value Per Share and Stock Price

This is a chart of the fully diluted adjusted book value per share of GLRE compared to the stock price.  GLRE has rarely traded below book (at least on a quarterly basis) and usually trades at a good premium (this is my comment, not GLRE's).

The average based on quarterly prices and data is around 1.23x, so it does seem cheap right now on this basis (again, my comment, not GLRE's).  Courtis said that they will leave it up to the market how to value GLRE.



So with that done, the Q&A started:


Q&A

Is the interest rate for margin debt (to support LOC) fixed or float?
Float.  No need to fix it.  Matches the LOC.  As to a follow up question about whether GLRE should be locking in low rates by issuing debt or borrowing, Einhorn pointed out that there is leverage already built into the GLRE model so there is no need to borrow.

Commercial Trucking Losses; was it market-wide or GLRE specific? 
They thought with better trucks and systems, lower traffic due to slower economy etc. that frequency should go down but it didn't; it went up.  This was market-wide and not GLRE specific and they can't find a reason it happened.  The policies are rolling off so shouldn't have impact in the future.

Thailand Floods?
Someone asked that Japanese insurance companies are upping their loss estimates on the Thailand flood; is GLRE seeing any of that?  GLRE said they have some exposure there but aren't seeing anything reaching their limits.

Not Being U.S. Corporation Factor in Trucking Losses? 
Someone asked whether being a non-U.S. entity was a factor in causing the losses in the Commerical Trucking business.  Would it have been different if they were a U.S. corporation and had their own guys on the ground looking at this stuff?  Being a Cayman entity, they are restricted in what they can do within the U.S.   Hedges pointed out that they do have outside auditors looking at this stuff; they go through audits both on the underwriting side and the claims side, so they do see what's going on.  They do a lot of that.

Would Competitors Put Pressure on Prices in GL's Areas of Focus? 
Hedges talked about the market in general and said that it is dynamic.  The portfolio would move around over time and "could change quite a bit".  They will go where the opportunities are so what that is today may not be the same as some time in the future.

Isn't Severity Pricing More Inefficient?
Someone pointed to the "Buffett model" of insurance, that severity pricing is more inefficient; shouldn't GLRE be looking at that? Hedges points out that there is a lack of information and modelling in the severity business that leads to "unknown unknowns".  Models were wrong during the hurricanes.  The tails are very hard to model.

Also, Hedges pointed out the difficulty in marrying the severity business with the asset side investment strategy. It's difficult to walk that line between the two sides and maintain their credit ratings.

He did mention that they will write severity business if the pricing makes sense, pointing out that they had a lot of it in 2006 when pricing was firmer after the hurricanes wiped out a lot of capital.

Question to Einhorn:  Sovereign Crisis, how and when will it unfold?
Einhorn said it's impossible to know when and how these things unfold.  Monetary policy is holding things together for now but that is not sustainable. As for how he is preparing for it, GLRE owns gold, FX options (Japanese yen puts) and credit and interest rate derivatives.   He can't say when and how; all he can do is prepare.

GLRE and Hedge Fund Conflict? 
Someone asked how Einhorn deals with potential conflict between the two entities.  Einhorn said that both portfolios are mirrors so they are managed the same, but they can't be exactly the same as securities can't move between the two entities.  So they will never be exactly the same but it's a rounding error problem.

Other issues that might cause a difference is something like the withholding tax.  Sometimes it may not make sense to own something in the Cayman entity for tax reasons.  There may be some difference due to legacy positions; hedge funds may own old positions held since before GLRE was formed.

Also, GLRE has limit on margin.  Sometimes in certain situations, the hedge fund might be more leveraged and that may cause a difference in returns.  But that won't be often.

But in general and over time, these differences should not be significant.

Question about 1.5-3 years short duration of insurance book
I think someone asked whether it would be better for GLRE to have a longer duration book in insurance.  Einhorn said that he doesn't think longer duration is good or better.  Long tail business has risk like inflation and being locked into a bad policy for a longer time.  Shorter tail businesses can be repriced more often so has less risk.

Hedges pointed out that shorter tail insurance and primary layers have less inflation risk.

Housing?
Someone asked Einhorn about the housing market. He said that housing is improving and it's broad-based.  In terms of construction, he said we are "well passed the bottom".

Equity Net Exposure based on Market View? 
Someone asked about corporate profit margins (high and unsustainable?) and whether Einhorn takes that into account in determining net long/short exposure.

Einhorn responded that he does make comments about the markets every now and then, but that it's immaterial in terms of structuring the equity portfolio.  The portfolio is structured on a bottoms up basis; it's a function of how many long ideas and short ideas they have.  After they build up their portfolio, they look at the net position and then sees if it makes sense given what's going on in the world.

What's the biggest challenge in growing premiums?
Someone asked if it was pricing, not being able to look at enough deals or what? Hedges said that it is general market conditions (soft market). The market was good when they started underwriting in 2006 after a lot of capital left (due to hurricanes).  Severity was good and GLRE had more back then.

How to think about macro bets in terms of net long/short exposure
Einhorn pointed out that macro bets are not included in the net long/short book; those are only equity positions.  Macro bets are additive to the overall portfolio.  As for what is in the macro bets, he points out that there is quite a lot of detail disclosed in the 10k and 10q's.  You can see sensitivities to certain exposures (how much will be gained/loss on yen movement etc...).

And that's it.

SEB: Seaboard Corporation

Not to get too caught up with Leucadia and what the smart folks there say, but this "wind at your back" and "protein" talk reminded me of a nice little company that may also be a protein play.

LUK bought National Beef partly because it's a play on the rising consumption of beef around the world as GDP per capita continues to rise;  people eat more meat instead of rice and beans as they get richer.

So here's another play on that, although Seaboard Corporation (SEB) said in their 2011 annual report that even though people consider them a play on protein consumption in the U.S., their protein business is only 1/3 of their sales and even less than that is sales in the U.S.

Anyway, before I go on, let me show you one incredible thing.  Here is the book value growth of SEB over various time periods compared to the S&P 500 index and Berkshire Hathaway.

Annualized book value growth:

                                   SEB                BRK              S&P 500
1 year:                         +17.5%             +4.6%            +2.1%
3 year:                         +13.3%           +12.3%          +14.1%
5 year:                         +11.8%             +7.3%            -0.2%
10 year:                       +17.1%           +10.2%            +2.9%

Since 1989:                 +12.6%           +15.4%            +8.2%
  (22 years)

That's pretty impressive. SEB has grown book value better than the S&P 500 in every time period except for the three year span (but that's just because the S&P 500 went down so much and came back; net-net over five years the market was flat), and it has even done better than BRK in every time period except for the really long term 22 years.

The following charts show the growth in book value per share of SEB compared to BRK and the total return of the S&P 500 index (indexed to 100) for the time periods 2001 - 2011 and 1989 - 2011.

SEB did way better over the past ten years, but not as good as BRK since 1989 (but still way better than the S&P 500 index).  But I wouldn't hold that against SEB.

Seaboard Corporation versus Berkshire Hathaway and the S&P 500 Index

(2001 - 2011)

Seaboard Corporation versus Berkshire Hathaway and the S&P 500 Index

(1989 - 2011)

Seaboard Corporation
Seaboard was founded by Otto Bresky.  The website says it started with a purchase of some flour mills back in 1918.  Otto Bresky ran it until 1973 when his son, H. Harry Bresky took over.  In 1982, they sold all the flour mills to Cargill and changed the name to Seaboard Corporation, and in 2006 H. Harry Bresky retired and his son Steven Bresky took over.   Steven Bresky owns 74.6% of SEB.  Since getting out of the flour milling business, they have invested in various business from poultry production/processing (which they sold in 2000) to the various businesses they own now (marine, pork, commodity trading and milling, power etc...).

These guys really run their business for returns on capital and their record shows that they have done very well.

Sales Breakdown by Geography
To show where they have been growing their sales, here is a comparison of sales by region in the year 2000 and the most recent 2011:

                                                                              2000                           2011
U.S.                                                                       725                            1,328
Caribbean, Central and South America                434                            2,226
Africa                                                                    261                            1,489
Pacific Basin and Far East                                    105                               238
Canada/Mexico                                                       32                               408
Eastern Mediterranean                                            18                                 49
Europe                                                                       9                                   8
Total                                                                   1,584                            5,747


2011 Annual Report
SEB is another one of those rare companies that have a really good annual report with no nonsense commentary about the business.  You won't hear the usual corporate jargon of the day or any other nonsense in the letter to shareholders. 

Here are the first two paragraphs from the 2011 Letter to Shareholders:

In the last couple of years, the pork business has done really well while the marine business has not done too well due to higher energy prices and lower shipping volumes due to the weak economy.

The pork business operating income grew +22% due to higher pork prices and more hogs processed.  Domestic consumption of pork per capita is "stalled" due to higher prices, but exports were up +23% to an all-time record.  Maybe SEB is already achieving what National Beef hopes to achieve in the future.

Summary of Financials
Here are some basic figures going back to 1989 or so to get a feel for how SEB has done over time.

(ROE is return on beginning equity)

SEB has paid dividends over the years but it has been less than 1% so is basically a token dividend.  Most of the cash generated is invested back into the various business lines.  We can see from this table that SEB has grown consistently with only one loss year despite what appears to be a cyclical, commodity business.

SEB has structured the business so that various segments can offset each other. For example, the Commodity Trading and Milling segment may do well in times of high grain prices when that may hurt the pork business.   As SEB explains in the annual reports over the years, they believe this sort of vertical integration helps to smooth out earnings volatility.   Their record shows this to be the case.

The average ROE and P/B ratio for various time periods have been:
                                                         
                                                               ROE                      P/B ratio
Five year average                                   13.9%                    1.2x
Ten year average                                    17.5%                    1.3x
Since 1989 (since '92 for p/b)                12.3%                    1.1x

We already know they have good returns from the book value growth.  On a ROE basis, we see that they have earned pretty consistent double-digit ROEs.

The stock price has also tended to trade near book value or a slight premium.

Segment Info

Segment Sales and Operating Income

So the above are just some figures pulled from the annual reports.  The segments are pretty consistent, but in one year the Power segment was in "other" and there was a poultry business that was sold in 2000.  I left out the "other" and also the turkey business is a new reported segment that's not in the above table.

Anyway, it's interesting to note how the Commodity Trading and Milling segment did do well when the pork business was getting hurt.  The pork business is really picking up and doing well as the marine business isn't doing well etc...

The marine segment is mostly business in the Americas.  The sugar segment is a business in Argentina and the Power segment is a power generating business in the Dominican Republic (the profit in 2011 was mostly due to the sale of an asset).  It seems that despite what is going on in Argentina, the business there is doing well.  The losses in 1999/2000 were from the Argentina default/devaluation.

So this is really an interesting mix of businesses and I bet Steinberg of Leucadia would look at this portfolio and love it saying that it would benefit greatly from increasing protein consumption around the world and inflation  (OK, maybe he will shudder at the Argentinian asset (as LUK owns CRESY and is not happy with what's going on down there).

But it seems like they are positioned similarly with the "wind at their back".   

One key difference is that SEB has always been an agriculture based business so they are not really straying far from their area of expertise (this is not to say that LUK is moving away from that; they know what they're doing).

Long-Lived Assets by Region
Since they do own assets in Argentina, the Dominican Republic and other places, we have to wonder how much of the assets are based in those places:

U.S.                             $ 515 mn
Domincan Republic    $ 121 mn
Argentina                    $ 112 mn
All other                      $   50 mn

So they do have some exposure in Argentina, but against $2 billion in net worth, this seems totally manageable.

Emerging Market Exposure
So from the above, we see that SEB owns assets in Argentina and the Dominican Republic, does a lot of shipping business in the Americas, and has a lot of sales even in Africa (milling etc...).   SEB also has exposure via exports.  (SEB is looking to increase exports to the Asian region; it already exports 10% of their pork to a few customers in Japan).

Strong Balance Sheet
They also have a solid balance sheet with $53 million in cash, $360 million in short term investments and $162 million in long term debt (including current maturities) against $2.2 billion in shareholders' equity as of the end of March 2012. 



Conclusion
So here is a company that has grown book value per share over time at a very nice clip, even beating Berkshire Hathaway in the past ten years.  The past decade has been rough for many and SEB seems to be doing very well.   Their good performance looks pretty consistent over time.

Unlike other situations where I said book value has grown nicely in the past decade, this one isn't a levered financial stock. 

The stock is in the agribusiness, and as Steinberg would say, the wind is at their back.  This portfolio would benefit from inflation and increasing protein consumption around the world.  They have exposure in some emerging markets so it's a nice way to get exposure there without the capital market risk of emerging markets (investing in local companies).

I am not big on 'theme' investing, usually, but if the idea stands on it's own without the thematic overlay, that's great.  If the theme fits, that's a bonus.  But I would never disregard the fundamentals to invest in a 'theme' (just look at FSLR, the solar play; ouch).

The marine business seems to be depressed now due to the high energy prices and weak economy, so if things eventually turn around, this segment can start contributing again.

The stock is now trading at $2,025/share and the 1Q book value per share was $1,787/share so it's now trading at 1.13x book value per share.

Given the conservative balance sheet, historical performance (see all of the above), and the sort of wind at your back on the various themes and the fact (that may excite some people) that this is not a financial stock makes this a very compelling idea at 1.1x book.  

Without naming names, I would bet that some value investors would certainly like this idea (especially the investors that like wind and protein.  If you don't know what I'm talking about, read my notes from the Leucadia National annual meeting here).

Anyway, as usual, this is not a stock recommendation. It's just some thoughts on an idea.  Some people will think it's interesting.  Others won't.   Do your own work and make up your own mind.  If you read this post, buy the stock and then lose money, you deserve what you get!

JCP: Johnson Premium Gone

So JCP tanked this week on bad earnings; it closed the week at $26.29/share.    I think this is an interesting situation but haven't done anything here yet, but things are getting interesting at this price.


The Situation
I assume most people in the market knows what's going on here.  Bill Ackman of Pershing Square along with Vornado Realty (REIT with real estate assets in NYC, Washington DC and others) bought a big stake in J.C. Penney to turn things around.  Last year they hired Ron Johnson, the guy behind the hugely successful Apple stores and was a factor in the success of Target.

They did a big presentation early this year laying out their plan to turn JCP around.  I posted some comments on that here:

Part 1
Part 2


The Johnson Premium
So the point now is that the stock price decline has pretty much taken out the Johnson premium and then some.  When he came on board, the stock price popped.

The announcement of his hiring came on June 14, 2011.  The stock closed on the day before that at $30.11/share.  After the announcement, the stock price closed at $35.37/share.

On January 25, 2012, JCP held a big meeting to present their new plan.   I think Ackman called this the most important day in retailing or some such.  The stock price on January 25, 2012 closed at $34.28/share and on January 26 it closed at $40.72/share  (This was actually the second day of the investor presentation when they announced the financial details).

So you can say that the JCP stock price of $30-35 is really the pre-plan-announcement JCP price.  $30 is the pre-Johnson-hire price. 

The JCP stock price is now trading BELOW the price on the day before it was announced that Johnson was hired and below the pre-presentation price.  In other words, the Johnson premium, or the Johnson plan premium is now more than gone; it's a Johnson discount.


JCP Floor Price
The above can be sort of a floor price (well, not a real floor as obviously Johnson can make things worse, the economy can get worse, the decline at JCP may continue etc...) on JCP stock, especially when looking at JCP as an event trade; will Johnson succeed or not?   "Yes" would take the stock up, and "no" would leave it stuck where it was before he came on board.

Another way to look at it is to assume, in the case of failure, that JCP will just muddle along as it has in the past five years.

The adjusted EPS (exclude charges and pension expenses) over the past five years were:

               JCP adjusted                  Operating
               EPS                                margin
2007       $4.63                              9.0%
2008       $2.17                              5.4%
2009       $1.86                              5.5%
2010       $2.24                              6.1%
2011       $0.94                              3.1%

average:  $2.37                              5.8%

So if JCP just muddles along as it has in the past five years, it may earn $2.37/share and on that, JCP stock is trading at 11.0x p/e.  All you need for this stock to be at 11x earnings is for JCP to do sort of what is was doing in the past five years.

OK, so sales have been declining so this five year average may be no good.  So let's assume that cost cutting and other things will keep operating margins around where it has been in the past five years; that's 5.8%. 

2011 sales were $17.3 billion (I know it dropped a lot this past quarter, but let's assume that is due to many big changes, inventory adjustments and other things going on now so may be temporary).  Assuming no growth in sales and a 5.8% margin, that's $1 billion in operating income.  Take out $227 million in net interest expense (2011 amount) for $773 million in pretax income and $464 million in net income.  With 218 million shares outstanding, that comes to $2.13/share.

So if sales can be maintained at the 2011 level and they can earn a 5.8% operating margin, that's $2.13/share in EPS and on that, the stock trading at 12.3x.  So that's not bad at all.  All they need to do is maintain sales and get a 5.8% margin.  Anything on top of that is a bonus.

Put a 10x multiple on the five year average EPS of $2.37 gives us a floor price of $23.70/share and a 10x multiple on the $2.13/share EPS derived above gives us $21.30/share. 

So let's say the Johnson non-success, fail price is around $21.00-24.00/share.  At $26/share, we are not very far from it.

Of course, I understand that a real failure may lead to further sales declines and actual losses.  So this isn't really a floor, floor.  It's just a reference point.

Upside
So anyway, Ackman said that JCP could earn $6.00/share in EPS by 2015.  At 10-15x p/e, that could lead to a stock price of $60 - 90/share. 

I haven't seen the actual presentation that Ackman made at the recent conference, but some reports have said that Ackman said JCP could be worth from $191 to $315/share.  JCP has sales per square foot of $132, but if they can get that up to $250/sf, JCP would be worth $191/share and it could be worth $315/share if sales got up to $350/sf.

That really sounds like a stretch.  Sephora boutiques inside of JCP stores have sales per square foot of $600, but I imagine that's quite a bit different than your typical department store space (apparel etc...).

It seems they believe that the store-within-a-store concept is going to really bump up those sales per square foot figures and drive traffic (Martha Stewart etc...).

Ackman apparently stressed that the key here (as if people didn't get it) is that it's is substantially cheaper for brands to have a store inside of JCP than in a separate space in a mall.

Anyway, those are Ackman's upside values.

To use more conservative figures, let's assume that JCP can keep sales flat with 2011 and then achieve 8% and 10% operating margins.

This is what they can earn with these operating margins (assuming 218 million shares outstanding, $227 million net interest expense and 40% tax rate):

                                    EPS                  Stock price range at 10-15x p/e
8% margin                  $3.18                $31.80 - 47.70
10% margin                $4.14                $41.40 - 62.20

(actually, with both Macy's and Kohl's trading at 10x or so p/e, there may be no reason to look at 15x valuations here, unless the JCP turnaround really starts to work)

Conclusion
At the very least, JCP stock has come down to the Johnson hire pre-announcement price so any premium attributed to the Apple magic is competely gone at this point.  The above shows that JCP is priced reasonably even if nothing exciting happens going forward.  If they just muddle along, the stock is priced within reason (or slightly on the high side).

However, if this turnaround starts to work, there can be substantial upside. 

Of course plenty can go wrong with this too.  But I don't think this is another Sears; JCP is now being run by a bunch of retailers, not finance people.

I think it's wrong to evaluate Johnson when he is just starting out.  He is trying to make a lot of changes at once so it's understandable that things are going to be tough until they get on track.  You don't sign a star to play for your team and then evaluate his performance after one or two games!

Let's see how this unfolds.

I do not own JCP at this point, but may in the future.  This may be one of those things you can play as a binary bet via longer term options; you bet that Johnson will succeed and don't worry about what happens in the short term.

The risk/reward ratio now with JCP at $26 is attractive also as a simple long as the upside can be $34/share (10x $6.00 eps in 2015) and downside of $2-4/share (you can plug in your own figures to get upside/downside ratios).