Learn Investing Secrets

There is a cat fight brewing between Direcway LLC, Starband and Wildblue Communications for the large number of people in the U.S. who can't get some type of broadband internet and are willing to pay $50 or more to get better speeds. They will provide a bridge to up to 1,000,000 or so underserved rural consumers and could make a splash over the next two years or so, but they will never reach the vaulted numbers they strive for within a timeframe to make a large impact or long term profits in the rural underserved marketplace.

There is a cat fight in reserve betwixt and between Direcway LLC, Starband and Wildblue radio for the large number of people in the U.S. who can't get some type of broadband internet and are willing to pay $50 or more to get choice speeds. The combatants are telling investors there are 20-30 million "potential users" out there in rural or underserved America...true, but the historical fact of the matter is that up to now, only 500,000 or so have been willing to pay as much as $50-$100 a month for the "so called" high speed services offered by Direcway, Starband and now Wildblue. What has transmuted to stir all the press and build-up hubub by the companies? The drain is that both the Wildblue ka band and new Direcway 7000 offerings will finally give consumers a more DSL/Cable-like internet experience...ie lower latency and higher upload speeds. They expect that tens of millions of rural Americans will flock to their doors to pay over $50 per month to be "connected". To a degree they are right. It has transform virtually impossible to funcion as a dealings without broadband internet and it is more and more difficult as a consumer to do without it. Even retailers (who obviously target consumers) are making sites that are very difficult to navigate unless you have a fast connection to the net. Pictures chew up bandwidth.

More and more people have found it less expensive to buy over the net...after all, we are nearing $2.50 gas now and who knows where it will end up. Imagine the cost of going to a store in a rural area in a vehicle that is getting 12 mpg (pickup with a V8) with $2.50 gas? Quick math says it would run you hard $16.00 for an 80 mile round trip.....do that three or four times a month and purchasing power at home from your easy gibbet starts looking pretty good. And you have time left over to plow a few fields if you like. Pretty easy picture to get. The problem is that all too many rural Americans even figured that shopping from home is a good thing...they just do it by the old reliable U.S. mail order system. No computer or internet required.

The marketing effort by the "combatants" needs to focus on how much think twice the experience will be over the net. Perhaps they can throw in some instructions on how to overcome the fear of computers and typing as well. This is what I beleive is hampering the efforts to reach rural landmass by satellite internet...fear of the potential user of new ways of doing things. This is a generational thing...younger rural folks are going to find the internet the only way to travel in the future, but by that time WiMax should cover most of rural Europe with cable/dsl-like pricing and satellite dishes might be used as birdbaths.

The point of this piece is to arm investors....don't make a long term bet on Wildblue or Direcway! They will provide a chain to up to 1,000,000 or so underserved rural consumers and could make a splash over the next two years or so, but they will never reach the vaulted numbers they strive for within a timeframe to make a large impact or long term profits in the rural underserved marketplace.

Someone who reads the blog sent me an email asking about a specific Japanese net-net. Rather than trying to choose the best net-nets from among the entire hoard in Japan, I would suggest doing one of two things:

1. Bigger investors can simply collect all the Japanese net-nets they find. 
2. Smaller investors can simply apply a tougher standard than mere net-netness.

In my own portfolio, I went with option #2. I bought 5 Japanese net cash stocks last year. I've since sold one of them. I have some cash. And am looking to add a couple more Japanese net cash stocks. Right now, they make up 30% of my portfolio. Again, I'm willing to go as high as 50% in Japan. We'll see what happens. 

But that's me.

What would I suggest for others interested in Japanese stocks?

Here's how I would look at Japan. If you can find stocks selling for less than net cash with few/no operating losses in their long-term history, buy them. Don't so much look for net-nets in general. Start with an even higher standard. Start with profitable, net cash companies. They are close to non-existent in the U.S. But not Japan. After that, I'm not sure I would necessarily just look at net-nets. For example, there are some cheap Japanese gas companies that are not net-nets (most of their assets are PP&E) but are super reasonably priced on an EV/EBIT basis. To me, it is more important to find totally obvious bargains than to get caught up in the definition of what a net-net is or isn't.

Totally obvious bargains fall into a few categories. Here are 2:

1. Stock market says the business is worth more dead than alive (profitable net cash stocks)
2. Stock is much cheaper than its peers around the world (gas companies)

In fact, if you really look, you may find some gas companies, grocery stores, etc. that are very cheap on an EV/EBIT or EV/EBITDA basis that you like better than some of the net-nets. That’s fine. Buy the most obvious bargains. The things that are clearly selling for less than they are worth.

If you're only going to buy half a dozen Japanese net-nets, you should look for net cash bargains. Once we are talking about receivables, inventory, etc. you need to know more about the business. So it needs to be a simple business or a business you can learn about. That's harder. For me personally that means it makes sense to buy net cash bargains in Japan and look for net-nets on the basis of receivables, inventory, etc. in the U.S. Because in the U.S., I have a better chance of knowing the difference between a predictable business and an unpredictable business.

If I could find 10 consistently profitable companies selling below net cash in the U.S., I wouldn’t buy any Japanese stock. Because I understand American businesses better. But I also understand that a consistently profitable company selling for less than net cash will work out as an investment regardless of how well I understand the business. And, of course, the idea is to buy a handful of these companies.

Not just one.

Talk to Geoff about Japanese Net-Nets

Check out the Newsletter

More Articles: