Last September, we posted a Guest Blogger's take on Steak n Shake. The story has gotten even more interesting since then, and you can read my recent column that appeared on RealMoney and Yahoo Finance.
Since my piece ran earlier this week, the company announced its intention to acquire a small insurance company Fremont Michigan InsuraCorp Inc (FFMH.OB), which was rejected this morning by Fremont.
Stay tuned..
*The author has a positions in Steak n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Wednesday, December 23, 2009
Saturday, December 19, 2009
Top Five Net/Nets to End 2009
It's hard to believe 2009 is almost behind us, and what a year it has been. Our own Cheap Stocks 21 Net/Net Index is currently flat since it's February 2008 inception. We'd hoped hoped for better performance, but this little index of misfits has performed better than the Russell Microcap Index, which is down about 20% during the same timeframe.
We plan to wind down CS21 once it hits the two year mark, and will replace it with a new net/net index.
We thought that there was no better way to say goodbye to 2009 then with a list of the current top five net/nets in order of market cap. Some of these names may look familiar to you, in fact one of them, Audiovox(VOXX) seems to have had a permanent place on the list.
Top Ten Net/Nets by Market Cap
Imation Corp(IMN)
Price: $8.78
Market Cap: $334
NCAV: $399.3
Cash: $111
P/E: NA
Mkt Cap/NCAV: .84
Movado(MOV)
Price: $9.22
Market Cap: $226
NCAV:$304
Cash: $49.5
P/E: N/A
Mkt Cap/NCAV: .74
Audiovoxx(VOXX)
Price: $7.39
Market Cap: $169
NCAV: $210
Cash: $70.5
P/E: NA
Mkt Cap/NCAV: .80
Opnext(OPXT)
Price: $1.86
Market Cap: $165
NCAV: $196
Cash: $155
P/E: .84
Mkt Cap/NCAV: .84
Axcelis Technologies(ACLS)
Price: $1.26
Market Cap: $131
NCAV: $173
Cash: $41
P/E: N/A
Mkt Cap/NCAV: .76
Merry Christmas, and happy holidays!
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
We plan to wind down CS21 once it hits the two year mark, and will replace it with a new net/net index.
We thought that there was no better way to say goodbye to 2009 then with a list of the current top five net/nets in order of market cap. Some of these names may look familiar to you, in fact one of them, Audiovox(VOXX) seems to have had a permanent place on the list.
Top Ten Net/Nets by Market Cap
Imation Corp(IMN)
Price: $8.78
Market Cap: $334
NCAV: $399.3
Cash: $111
P/E: NA
Mkt Cap/NCAV: .84
Movado(MOV)
Price: $9.22
Market Cap: $226
NCAV:$304
Cash: $49.5
P/E: N/A
Mkt Cap/NCAV: .74
Audiovoxx(VOXX)
Price: $7.39
Market Cap: $169
NCAV: $210
Cash: $70.5
P/E: NA
Mkt Cap/NCAV: .80
Opnext(OPXT)
Price: $1.86
Market Cap: $165
NCAV: $196
Cash: $155
P/E: .84
Mkt Cap/NCAV: .84
Axcelis Technologies(ACLS)
Price: $1.26
Market Cap: $131
NCAV: $173
Cash: $41
P/E: N/A
Mkt Cap/NCAV: .76
Merry Christmas, and happy holidays!
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Monday, November 16, 2009
Biggest Net/Nets In Years: One Year Later
This time last year, our piece Biggest Net/Nets In Years featured an interesting list of names. Truth is, we'd rarely, if ever seen net/nets of this size, and it was the direct result of a free falling market. We thought it would be interesting to review the performance of these companies one year later:
Ingram Micro
Ticker: IM
Price Then: $13.58
Price Now: $18.69
Change: +37.6%
Tech Data
Ticker: TECD
Price Then: $21.47
Price Now: $41.88
Change: +95.1%
Benchmark Electonics
Ticker: BHE
Price Then: $11.77
Price Now: $18.00
Change: +52.9%
USEC
Ticker: USU
Price: $3.90
Price Now: $4.09
Change: +4.9%
Furniture Brands Intl
Ticker: FBN
Price: $4.61
Price Now: $3.61
Change: -21.7%
The average return for these companies was 33.76%. During the same period, the Russell 2000 was up 15.9%, the S&P 500 17.5%, and the Russell Microcap about 10.4%. Hindsight, of course, is indeed 20/20, but the land of the nets/nets continues to be an interesting pond in which to fish.
*The author does not positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Ingram Micro
Ticker: IM
Price Then: $13.58
Price Now: $18.69
Change: +37.6%
Tech Data
Ticker: TECD
Price Then: $21.47
Price Now: $41.88
Change: +95.1%
Benchmark Electonics
Ticker: BHE
Price Then: $11.77
Price Now: $18.00
Change: +52.9%
USEC
Ticker: USU
Price: $3.90
Price Now: $4.09
Change: +4.9%
Furniture Brands Intl
Ticker: FBN
Price: $4.61
Price Now: $3.61
Change: -21.7%
The average return for these companies was 33.76%. During the same period, the Russell 2000 was up 15.9%, the S&P 500 17.5%, and the Russell Microcap about 10.4%. Hindsight, of course, is indeed 20/20, but the land of the nets/nets continues to be an interesting pond in which to fish.
*The author does not positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Wednesday, November 11, 2009
JG Boswell Fundamentals
We've reviewed 7 years of data, crunched a lot of numbers for JG Boswell, and have been able to string together seven years worth of summarical fundamentals. Due to the complexity, and growing size of our spreadsheet, we've decided to share just some of the data that will put BWEL's current valuation in perspective.
JG Boswell (BWEL)
7 Year Averages Based on Annual Data:
P/E: 28.6
Price/Sales: 1.61
Price/Book Value: 1.44
Net Margin: 7.52%
EV/EBITDA: 9.88
Dividend Yield: 2.29%
Market Cap: $605 million
Enterprise Value: $722 million
Current Data (2009 Annual)
P/E: 21.5
Price/Sales: 1.4
Price/Book Value: 1.06
Net Margin: 6.56%
EV/EBITDA: 8.45
Dividend Yield: 2.89%
Current Market Cap: $473.5 million
Current Enterprise Value: $630 million
We are also contemplating putting the full seven years of financial statements into excel, and distributing these to anyone willing to submit $100 to our paypal account. We've never charged for anything before, but this will be fairly labor intensive, and we're just not sure it's worth the effort. Cheap Stock readers can be the judge on this one.
If you have any interest, please contact us at:cheapstocks@verizon.net
Many thanks to Tim Eriksen of Eriksen Capital Management, who was kind enough to provide us with some of the earlier Boswell data.
*The author has a position in JG Boswell. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
JG Boswell (BWEL)
7 Year Averages Based on Annual Data:
P/E: 28.6
Price/Sales: 1.61
Price/Book Value: 1.44
Net Margin: 7.52%
EV/EBITDA: 9.88
Dividend Yield: 2.29%
Market Cap: $605 million
Enterprise Value: $722 million
Current Data (2009 Annual)
P/E: 21.5
Price/Sales: 1.4
Price/Book Value: 1.06
Net Margin: 6.56%
EV/EBITDA: 8.45
Dividend Yield: 2.89%
Current Market Cap: $473.5 million
Current Enterprise Value: $630 million
We are also contemplating putting the full seven years of financial statements into excel, and distributing these to anyone willing to submit $100 to our paypal account. We've never charged for anything before, but this will be fairly labor intensive, and we're just not sure it's worth the effort. Cheap Stock readers can be the judge on this one.
If you have any interest, please contact us at:cheapstocks@verizon.net
Many thanks to Tim Eriksen of Eriksen Capital Management, who was kind enough to provide us with some of the earlier Boswell data.
*The author has a position in JG Boswell. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Tuesday, November 03, 2009
JG Boswell Update: 2009 Annual Report
Shares of cotton and farming giant JG Boswell, owner of an estimated 142,000 California acres, and another 30,000 in Australia, are in positive territory year to date in 2009, up 14% excluding dividends. That's still down substantially from $1000 range the Company briefly touched in May of 2008.
The appeal of Boswell (BWEL) is not in its farming operations, which although impressive in their own right, merely represent the current use of assets which might ultimately be much more valuable used for other purposes.
As we've stated several times before, the real gem may lie beneath some of Boswell's land: massive amounts of water that may be worth several billion. ("May" being the operative word. Ultimately, in order for value to be realized, assets must be converted, or have a good probability of being converted into cash. Water is a touchy and political subject, especially in California, and given dire predictions about California agriculture by officials in the new administration.)
The Company held it's annual meeting last month in Pasadena, and we recently obtained a copy of the company’s 2009 annual report. Here are the highlights for the year ended June 2009:
Current Price: $477
Avg 3 month volume: 430
Current Dvd Yield: 2.9%
Quarterly Dvd: $3.50/shr
2009 Revenue: $339.034 million (down 7.6%)
Net Income: $22.15 million (+45%)
Diluted EPS/shr: $22.51 (+46%)
Current Assets: $303.407 million
Cash: $2.066 million
Total Assets: $800.701 million
Current Liab: $282.139 million
Short Term Debt: $158.630 million
Long Term Debt: $0
Stockholders Equity: $444.817 million
Shares Out: 976,301
Book Value Per share: $455.6
Market Cap: $455.61 million
Enterprise Value: $612.18 million
Enterprise Value/California Acre: $4311 (estimated)
2009 revenue fell 7.6% to $339 million, while net income jumped 45% to $22.70 (fully diluted). Boswell ended the year with $158.6 million in short-term debt and no long-term debt. Shares currently trade at book value, and yield 2.9%.
Based on just the California land, we estimate Enterprise Value/Acre to be about $4311, and that ignores any value in the Australian land. We continue to be intrigued by the Boswell story, especially at these prices. Buyer beware, though: Shares are difficult to obtain, information is scarce, and there is little liquidity.
Many thanks to Jack Norberg, chairman of Standard Investment Chartered Inc., of Costa Mesa California, who we consider to be one of the foremost experts on high quality pink sheet stocks. Jack attends the Boswell annual meetings, and has been a great help with data, and as a sounding board on ideas.
We've also been compiling Boswell data for several years now, and will be posting 5 years of fundamental data for Boswell in the near future.
*The author has a position in JG Boswell. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
The appeal of Boswell (BWEL) is not in its farming operations, which although impressive in their own right, merely represent the current use of assets which might ultimately be much more valuable used for other purposes.
As we've stated several times before, the real gem may lie beneath some of Boswell's land: massive amounts of water that may be worth several billion. ("May" being the operative word. Ultimately, in order for value to be realized, assets must be converted, or have a good probability of being converted into cash. Water is a touchy and political subject, especially in California, and given dire predictions about California agriculture by officials in the new administration.)
The Company held it's annual meeting last month in Pasadena, and we recently obtained a copy of the company’s 2009 annual report. Here are the highlights for the year ended June 2009:
Current Price: $477
Avg 3 month volume: 430
Current Dvd Yield: 2.9%
Quarterly Dvd: $3.50/shr
2009 Revenue: $339.034 million (down 7.6%)
Net Income: $22.15 million (+45%)
Diluted EPS/shr: $22.51 (+46%)
Current Assets: $303.407 million
Cash: $2.066 million
Total Assets: $800.701 million
Current Liab: $282.139 million
Short Term Debt: $158.630 million
Long Term Debt: $0
Stockholders Equity: $444.817 million
Shares Out: 976,301
Book Value Per share: $455.6
Market Cap: $455.61 million
Enterprise Value: $612.18 million
Enterprise Value/California Acre: $4311 (estimated)
2009 revenue fell 7.6% to $339 million, while net income jumped 45% to $22.70 (fully diluted). Boswell ended the year with $158.6 million in short-term debt and no long-term debt. Shares currently trade at book value, and yield 2.9%.
Based on just the California land, we estimate Enterprise Value/Acre to be about $4311, and that ignores any value in the Australian land. We continue to be intrigued by the Boswell story, especially at these prices. Buyer beware, though: Shares are difficult to obtain, information is scarce, and there is little liquidity.
Many thanks to Jack Norberg, chairman of Standard Investment Chartered Inc., of Costa Mesa California, who we consider to be one of the foremost experts on high quality pink sheet stocks. Jack attends the Boswell annual meetings, and has been a great help with data, and as a sounding board on ideas.
We've also been compiling Boswell data for several years now, and will be posting 5 years of fundamental data for Boswell in the near future.
*The author has a position in JG Boswell. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Thursday, October 29, 2009
A Shoutout to Cheap Stocks 21 Net Net Index Member Richardson Electronics (RELL) from the Value Investing Congress
At first, I could not believe my ears when Candace King Weir, of Paradigm Capital Management mentioned Richardson Electronics (RELL), a member of our very own Cheap Stocks 21 Net Net Index, at the 5th Annual New York Value Investing Congress last week.
Weir, a self-professed bottom up stock picker, held out tiny Richardson as one of her favorite ideas citing the following:
*High barriers to entry in their market
*Trading at a discount to tangible book value
*Trading at just 7.5 times expected 2011 eps ($.80)
*Believes shares are worth $9-$11
Although Richardson, which is up 21 percent since the inception of the CS21 Net Net Index in February, 2008, no longer trades below its net current asset value, its very close at just 1.06 times NCAV.
Richardson Electronics
Ticker: RELL
Price: $5.94
Market Cap: $106 million
NCAV:$100 million
Mkt Cap/NCAV: 1.06
Cash: $43.9
Cash/Share:$2.45
Debt: $52.3
*The author does not have a position in Richardson Electronics (RELL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Weir, a self-professed bottom up stock picker, held out tiny Richardson as one of her favorite ideas citing the following:
*High barriers to entry in their market
*Trading at a discount to tangible book value
*Trading at just 7.5 times expected 2011 eps ($.80)
*Believes shares are worth $9-$11
Although Richardson, which is up 21 percent since the inception of the CS21 Net Net Index in February, 2008, no longer trades below its net current asset value, its very close at just 1.06 times NCAV.
Richardson Electronics
Ticker: RELL
Price: $5.94
Market Cap: $106 million
NCAV:$100 million
Mkt Cap/NCAV: 1.06
Cash: $43.9
Cash/Share:$2.45
Debt: $52.3
*The author does not have a position in Richardson Electronics (RELL). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Thursday, October 22, 2009
Notes From The Fifth Annual Value Investing Congress Day 2
Fifth Annual Value Investing Congress Day 2: Part 1
Jason Stock and William Waller, M3 Funds
Banks & Thrifts: Opportunities in a Troubled Sector
M3 was founded in 2007, and invests (long and short) in small and mid cap names in the US bank and thrift sector. There are 1300 publicly traded banks, and 93% have market caps less than $500 million. Stock presented his view of the current state of the banking sector:
• Banks still undercapitalized
• Credit quality still deteriorating
• More bank failures
• Unemployment rate will continue to rise
• Commercial real estate is in trouble
The team is bearish overall on the sector, believing that banks are currently priced for perfection. Still, he and Waller are finding opportunity on the long side, and look for the following:
• Low Price/Tangible Book
• Excess capital
• Low loan/deposits
• Attractive markets
• Bearish management team
• Share repurchase plan
• Attractive deposit base
One of their favorite long ideas:
Beneficial Mutual Bancorp (BNCL)
• $4.2 billion in assets
• Oldest/largest bank in Philly
• Excess capital
• Owns 42 of 68 branches
• Mutual holding company structure has benefits
• Trading at 79% “fully converted book value”
Kian Ghazi, Hawkshaw Capital Management
Kicking the Tires
Ghazi, who runs a concentrated long/short US equity portfolio, emphasizes proprietary, investigative research in his investment process:
• Focuses on value
• Identifies high-quality one-of- a-kind franchises
• Ensures financial strength, have excess cash, strong balance sheet, and monetizable assets
• “Kick the Tires Hard”- know what you own
• Asks: “What could cause stock to drop 30% or more, that would cause you to not want to buy substantially more?”
Ghazi presented the case for Coremark (CORE)
• Second largest distributor to convenience stores
• $300 million market cap
• $30 million net debt
• Trading at 12 times est 2009 earnings, 8 times TTM earnings
• Admits that this is a low margin business with low ROC, but is well capitalized, difficult to replace, underfollowed
• Highly fragmented industry
• Cigarette sales account for 70% of revenue, but just 29% of gross profit
• Company moving toward providing more fresh foods, which have much higher margins. This should more than supplant potentially declining cigarette sales.
• Believes company may ultimately be worth $45-$50
Eric Sprott, CEO Sprott Asset Management
The Financial Crisis Isn’t Over
Sprott began by pointing out that Dow 10,000 is meaningless; we were there 10 years ago, and since then, have “accomplished nothing”. He is highly skeptical of the US banking industry, and predicts many more bank failures in the days ahead.
Sprott also took shots at the “Quantitative Easing” process being used at the Fed these days, likening it to the very dangerous practice of simply printing more money. He questioned who is buying all of the US govt debt, with issuance up 200% this year, and concluded that it’s the central banks doing all of the buying. Sprott then asked the most relevant question: “What happens when quantitative easing is done?”
Sprott believes that gold is a relevant place to invest these days, pointing out a sticky supply/demand situation, fact that more demand is consumed than produced each year, central banks have been selling as the price has risen substantially over the past ten years. He doubts that some who claim to have gold in their vaults actually do.
Some Favorite Ideas:
• Norseman Gold PLC (ASX:NGX)
• Corridor Resources (TSX:CDH)
• Sensio Technologies (TSX-V:SIO)
Alexander Roepers, Portfolio Manager, Atlantic Investment Management
Atlantic’s Approach to Value Investing
Roepers who runs a concentrated portfolio, laid out the rules of the road for concentrated investors:
• Define your universe
• Transparent companies that can be analyzed and understood
• No leverage in the portfolio
• Only companies with solid balance sheets
Roepers Universe:
• Market caps between $1 billion and $20 billion
• Total of 450 US companies, 700 international
• Takes positions between 2% and 7% of outstanding shares
Ropers Avoids Companies exposed to:
• Technological obsolescence (software)
• Product Liability (tobacco, pharma, asbestos)
• Government Intervention (cable, utilities)
• Lack of transparency (banks, brokerages, insurance)
Roepers is an engaged shareholder:
• Build rapport with managers
• Craft/discuss proposals with management
• Does not seek board seats/proxy fights
• Will apply pressure in the press, when necessary
Roepers likes Smucker’s (SJM)
• Consumer staples, benefits from slow economy
• Bought Folger’s last year
• Strong Cash flow
• Trading at 12 times earnings
• 12 times EV/EBIT
• 12 month target: $74
Whitney Tilson and Glenn Tongue, T2 Partners
More Mortgage Meltdown & a Stock Idea
You can always count on Whitney Tilson to spoil the party with yet another sobering discussion of the mortgage mess. Yet, the story must be told, and Tilson, as always, does a fine job of it.
• Home prices are currently affordable, but that’s due to low interest rates and massive price declines
• Home prices rose slightly this past Summer
• However, there will be another leg down
The Stabilization we’ve recently see, is due to the following factors none of which are sustainable:
• Low interest rates
• The $8000 government tax credit to buyers (set to expire in Novemeber)
• Decline in resets
• FHA support
• Seasonality
Tilson pegs the current housing overhang at 7 million homes, which he believes is effectively 24 months of inventory. He believes that home prices will fall another 10% before we hit bottom.
Glenn Tongue presented one of the duos favorite ideas, Iridium (IRDM)
• Satellite systems
• Has 66 satellites in low orbit, 7 spares
• Enterprise value: $492 million
• Trades at just 3.8 X Ev/EBITDA
• Estimates 2009 EBITDA at $130 million
• Will launch new, more advanced satellites in 2014
• Much can be financed through internally generated cash flow, and payloads carried on the satellites for others
• Sees this as a multi-bagger
Zeke Ashton, Managing Partner, Centaur Capital Partners
Stocks the Rally Left Behind
The always-interesting Ashton has been putting up some great numbers; his fund is currently #1 in the one, two, and three year periods in its category. Ashton highlighted three names at this Congress; Alleghany (Y), Lab Corp (LH) and MVC Capital (MVC), none of which has materially participated in the recent market rally. (For more on Alleghany, please see notes from the last Value Investing Congress, held in Pasadena, this past May).
Lab Corp (LH)
• #2 player in the clinical lab testing business, behind Quest
• $4.5 billion in revenue
• Market Cap $7.05 billion, Enterprise value $8.4 billion
• Estimates $670 million free cash flow in 2009, trades at 10.5 X FCF
• Share buybacks
• Has suffered due to perceptions of what “Obamacare” may do to the industry
• May be worth 15-17X FCF, or $95-$105 per share
• Centaur’s largest holding
MVC Capital (MVC)
• “Dollar trading for $.55”
• Business development company that makes debt and equity investments in small companies
• Currently has 32 investments
• Value of underlying portfolio misunderstood
Bill Ackman, Managing Member, General Partner Pershing Square, LP
Prison’s Dilemna
Ackman closed out the Fifth Annual Value Investing Congress with the case for private prison owner/operator Corrections Corp of America (CXW):
• Not just a prison operator, but real estate; owns land and buildings at most locations
• Market Cap $2.9 billion, EV $4.1 billion
• 2009 Est Cap rate: 12.2%
• P/FCF 13.2
• Maintenance cap ex limited
• Rising crime rate, overcrowded state prisons.
• More efficient/cheaper than state run prisons
• Bought back 8.2 million share below book
• Board and management have skin in the game: own 6 million shares
• 61000 beds
• Solid management
• Worth $40-$54 per share
• Ackman’s position is passive; he owns more than 9% of the Company, but has no current intentions of activism
Ackman also suggested Realty Income (O) as a good short candidate. Believes company is overpriced, and that focus on monthly dividends as an attractive feature to investors will not last.
Jason Stock and William Waller, M3 Funds
Banks & Thrifts: Opportunities in a Troubled Sector
M3 was founded in 2007, and invests (long and short) in small and mid cap names in the US bank and thrift sector. There are 1300 publicly traded banks, and 93% have market caps less than $500 million. Stock presented his view of the current state of the banking sector:
• Banks still undercapitalized
• Credit quality still deteriorating
• More bank failures
• Unemployment rate will continue to rise
• Commercial real estate is in trouble
The team is bearish overall on the sector, believing that banks are currently priced for perfection. Still, he and Waller are finding opportunity on the long side, and look for the following:
• Low Price/Tangible Book
• Excess capital
• Low loan/deposits
• Attractive markets
• Bearish management team
• Share repurchase plan
• Attractive deposit base
One of their favorite long ideas:
Beneficial Mutual Bancorp (BNCL)
• $4.2 billion in assets
• Oldest/largest bank in Philly
• Excess capital
• Owns 42 of 68 branches
• Mutual holding company structure has benefits
• Trading at 79% “fully converted book value”
Kian Ghazi, Hawkshaw Capital Management
Kicking the Tires
Ghazi, who runs a concentrated long/short US equity portfolio, emphasizes proprietary, investigative research in his investment process:
• Focuses on value
• Identifies high-quality one-of- a-kind franchises
• Ensures financial strength, have excess cash, strong balance sheet, and monetizable assets
• “Kick the Tires Hard”- know what you own
• Asks: “What could cause stock to drop 30% or more, that would cause you to not want to buy substantially more?”
Ghazi presented the case for Coremark (CORE)
• Second largest distributor to convenience stores
• $300 million market cap
• $30 million net debt
• Trading at 12 times est 2009 earnings, 8 times TTM earnings
• Admits that this is a low margin business with low ROC, but is well capitalized, difficult to replace, underfollowed
• Highly fragmented industry
• Cigarette sales account for 70% of revenue, but just 29% of gross profit
• Company moving toward providing more fresh foods, which have much higher margins. This should more than supplant potentially declining cigarette sales.
• Believes company may ultimately be worth $45-$50
Eric Sprott, CEO Sprott Asset Management
The Financial Crisis Isn’t Over
Sprott began by pointing out that Dow 10,000 is meaningless; we were there 10 years ago, and since then, have “accomplished nothing”. He is highly skeptical of the US banking industry, and predicts many more bank failures in the days ahead.
Sprott also took shots at the “Quantitative Easing” process being used at the Fed these days, likening it to the very dangerous practice of simply printing more money. He questioned who is buying all of the US govt debt, with issuance up 200% this year, and concluded that it’s the central banks doing all of the buying. Sprott then asked the most relevant question: “What happens when quantitative easing is done?”
Sprott believes that gold is a relevant place to invest these days, pointing out a sticky supply/demand situation, fact that more demand is consumed than produced each year, central banks have been selling as the price has risen substantially over the past ten years. He doubts that some who claim to have gold in their vaults actually do.
Some Favorite Ideas:
• Norseman Gold PLC (ASX:NGX)
• Corridor Resources (TSX:CDH)
• Sensio Technologies (TSX-V:SIO)
Alexander Roepers, Portfolio Manager, Atlantic Investment Management
Atlantic’s Approach to Value Investing
Roepers who runs a concentrated portfolio, laid out the rules of the road for concentrated investors:
• Define your universe
• Transparent companies that can be analyzed and understood
• No leverage in the portfolio
• Only companies with solid balance sheets
Roepers Universe:
• Market caps between $1 billion and $20 billion
• Total of 450 US companies, 700 international
• Takes positions between 2% and 7% of outstanding shares
Ropers Avoids Companies exposed to:
• Technological obsolescence (software)
• Product Liability (tobacco, pharma, asbestos)
• Government Intervention (cable, utilities)
• Lack of transparency (banks, brokerages, insurance)
Roepers is an engaged shareholder:
• Build rapport with managers
• Craft/discuss proposals with management
• Does not seek board seats/proxy fights
• Will apply pressure in the press, when necessary
Roepers likes Smucker’s (SJM)
• Consumer staples, benefits from slow economy
• Bought Folger’s last year
• Strong Cash flow
• Trading at 12 times earnings
• 12 times EV/EBIT
• 12 month target: $74
Whitney Tilson and Glenn Tongue, T2 Partners
More Mortgage Meltdown & a Stock Idea
You can always count on Whitney Tilson to spoil the party with yet another sobering discussion of the mortgage mess. Yet, the story must be told, and Tilson, as always, does a fine job of it.
• Home prices are currently affordable, but that’s due to low interest rates and massive price declines
• Home prices rose slightly this past Summer
• However, there will be another leg down
The Stabilization we’ve recently see, is due to the following factors none of which are sustainable:
• Low interest rates
• The $8000 government tax credit to buyers (set to expire in Novemeber)
• Decline in resets
• FHA support
• Seasonality
Tilson pegs the current housing overhang at 7 million homes, which he believes is effectively 24 months of inventory. He believes that home prices will fall another 10% before we hit bottom.
Glenn Tongue presented one of the duos favorite ideas, Iridium (IRDM)
• Satellite systems
• Has 66 satellites in low orbit, 7 spares
• Enterprise value: $492 million
• Trades at just 3.8 X Ev/EBITDA
• Estimates 2009 EBITDA at $130 million
• Will launch new, more advanced satellites in 2014
• Much can be financed through internally generated cash flow, and payloads carried on the satellites for others
• Sees this as a multi-bagger
Zeke Ashton, Managing Partner, Centaur Capital Partners
Stocks the Rally Left Behind
The always-interesting Ashton has been putting up some great numbers; his fund is currently #1 in the one, two, and three year periods in its category. Ashton highlighted three names at this Congress; Alleghany (Y), Lab Corp (LH) and MVC Capital (MVC), none of which has materially participated in the recent market rally. (For more on Alleghany, please see notes from the last Value Investing Congress, held in Pasadena, this past May).
Lab Corp (LH)
• #2 player in the clinical lab testing business, behind Quest
• $4.5 billion in revenue
• Market Cap $7.05 billion, Enterprise value $8.4 billion
• Estimates $670 million free cash flow in 2009, trades at 10.5 X FCF
• Share buybacks
• Has suffered due to perceptions of what “Obamacare” may do to the industry
• May be worth 15-17X FCF, or $95-$105 per share
• Centaur’s largest holding
MVC Capital (MVC)
• “Dollar trading for $.55”
• Business development company that makes debt and equity investments in small companies
• Currently has 32 investments
• Value of underlying portfolio misunderstood
Bill Ackman, Managing Member, General Partner Pershing Square, LP
Prison’s Dilemna
Ackman closed out the Fifth Annual Value Investing Congress with the case for private prison owner/operator Corrections Corp of America (CXW):
• Not just a prison operator, but real estate; owns land and buildings at most locations
• Market Cap $2.9 billion, EV $4.1 billion
• 2009 Est Cap rate: 12.2%
• P/FCF 13.2
• Maintenance cap ex limited
• Rising crime rate, overcrowded state prisons.
• More efficient/cheaper than state run prisons
• Bought back 8.2 million share below book
• Board and management have skin in the game: own 6 million shares
• 61000 beds
• Solid management
• Worth $40-$54 per share
• Ackman’s position is passive; he owns more than 9% of the Company, but has no current intentions of activism
Ackman also suggested Realty Income (O) as a good short candidate. Believes company is overpriced, and that focus on monthly dividends as an attractive feature to investors will not last.
Wednesday, October 21, 2009
Notes From The Fifth Annual Value Investing Congress Day 1
David Nierenberg, Founder, D3 Family Funds
D3 War Stories: Practical Lessons About Building and Protecting Shareholder Value by Improving Corporate Governance
David Nierenberg, who has appeared at several other VIC’s including Pasadena this past May, led off the first day of the Congress. Nierenberg’s typically invest in busted microcap growth companies. His average holding period is 7 years, and there is 5 year lockup for investors.
The focus of this presentation was the importance of corporate governance. Nierenberg believes that much of the activism occurring these days is focused on the wrong things. He believes that putting a board in place that is capable and independent, focused on the real issues, and properly incented for the long-term can greatly improve potential company success.
Nierenberg highlighted three companies, including Move Inc (MOVE), Brooks Automation (BRKS), and Heartland Payment Systems (HPY). D3 currently has holdings in these companies, including 18.2% of Move, and 7.2% of Brooks.
Nierenberg believes that Heartland, a credit and bank card processor which currently trades for around $14.00, may ultimately be worth more than $ 40. Nierenberg cited the Company’s strong management, solid compound annual growth rates in revenue, EBITDA and EPS, and an overreaction to a security breach that sent the stock plummeting.
Nierenberg concluded with 3 points:
• Investing is not all about the numbers, it’s also about people and process
• Selling is not the only exit option (change can be brought about by major shareholders)
• In microcaps, large block positions and knowledge about governance can protect and build shareholder wealth.
Steve Dobson, CEO Amherst Securities
Fishing in a Poisoned Pond
Frequent VIC attendees have become accustomed to their bi-annual dose of bad news on the mortgage and housing front, and I am among many that are thankful for the honest portrayal. For the past two years, that somber topic has been delivered by Glen Tongue and Whitney Tilson, authors of “More Mortgage Meltdown”. Today, it was Steve Dobson’s turn.
Dobson’s expertise and analysis was a critical component of the book, and his candid portrayal of the continuing difficulties facing the residential mortgage market was sobering.
Among Dobson’s more frightening observations (and there were many):
• There are 8 million homes currently not paying their mortgage
• Once a borrower has missed 2 mortgage payments, foreclosure is all but inevitable
• The rate of recoveries is still declining
• The resolution process is grinding to a halt
• The amount of bank-owned real estate is falling, but that’s primarily because of a slowdown in the foreclosure process
• 29% to 50% of modified mortgages re-defaulted within six months
• 79% of all defaulted loans have a current loan to value (LTV) ratio above 120%
If there was any good news, Dobson reported that loss severities (recovery rates) have stabilized in all states.
Dobson concluded that:
• Loss severity will not increase substantially
• Losses will take longer to realize
• Loan modifications/Government programs to address the situation will evolve
David Einhorn, Chairman, Greenlight Capital
Liquor Before Beer, In the Clear
Einhorn opened his presentation with his thoughts on the importance of learning from bad decisions. He cited his 2005 IRA Sohn conference presentation on the merits of homebuilder NBC Holdings, which ultimately fell 40% as the homebuilding sector collapsed. Although the rest of the sector fell much further, an average of 70%, Einhorn learned the following:
• It is not reasonable to be agnostic about the big picture, a macro view is vital
• Even given the above statement, you can still be a stock picker
Einhorn went onto give a stirring speech about what he believes to be the current macro risks:
• The government is too focused on the short-term, too focused on getting re-elected.
• Too much focus on special interests (protection of banks, for one)
Einhorn believes that the lesson of the Lehman collapse, a company that he very successfully shorted, is that companies should not be so big that their collapse can jeopardize the entire financial system.
He went onto state that he has changed his view about the validity of owning gold, given its propensity to perform well not just during inflationary times, but when monetary policies are poor in general. In terms of form of ownership, Einhorn owns physical gold, believing that to be even more efficient than the ETF.
Joel Greenblatt, Managing Partner Gotham Capital
Formula Investing with a Value Mindset
Greenblatt, author of “The Little Book That Beats the Market”, presented a re-cap of his concept of the “Magic Formula”, which utilizes earnings yield and return on invested capital as the criteria to select stocks that will outperform. While he admitted that historical return on capital is backward looking, he stated the importance of estimating future ROC.
Greenblatt described two periods of underperformance by the strategy:
• 2/1/2006 through 12/1/2008 (34 months)
• 5/1/2002 through 6/1/2003 (13 months)
Despite his somewhat self deprecating depiction of the Magic Formula, the returns utilizing the strategy have been outstanding. For instance using back tested data, the strategy returned 291 percent or 14.6 percent annualized, for the 10 year period ended 5/30/2009. During the same period, the S&P 500 Index was down 2 percent (-.2 percent annualized). Furthermore, the Magic Formula has outperformed the market for ten of the past eleven years, through 9/30/2009.
Despite the simplicity of utilizing the Magic Formula, Greenblatt’s data suggests that it is not a good candidate to use for identifying short candidates. For instance, going long the top decile of Magic Formula companies and short the bottom decile substantially increases portfolio volatility, and does not enhance return.
Julian Robertson, Founder, Tiger Management
Question and Answer Session
Investing legend Julian Robertson took questions for a half hour; an extremely pleasant surprise for this Congress. Here are some of Robertson’s thoughts:
Concerns about the current state of affairs:
• Big concern is that we are still spending more than we earn, which is not sustainable. Debt must be paid back, and we are not even thinking about that. More focused on borrowing more from the Chinese, and hoping they won’t decide they have better things to do with their money.
On Energy:
• Although bullish on oil stocks, he is impressed by advances in solar energy. Believes that solar will continue to improve, wind power too, and this will ultimately help the environment and hurt oil companies.
On China:
• Might be a bubble
• Consumption not enough to pull the world out of recession
On Gold:
• An anti-gold bug—“none has been used since it was discovered”
On Norway:
• The most prosperous/sound country in the world
Companies he’s bullish on:
• Visa, Mastercard, Ryanair, Intel
What He’s Learned/Best Advice:
• Never be overconfident
• Don’t get overly enthusiastic about your business
Lloyd Khaner, General Partner Gotham, Kahner Capital
The Key to Turnarounds
First time presenter at the Value Investing Congress, Khaner, who has compounded 445.4% since 1991 (versus295.2% for the S&P 500), looks for the following attributes in potential investments:
• Unique management
• Strong decision making ability
• Avoid value traps
• Debt/Equity less than 70%
• Avoid dying industries
• Franchise companies with manageable debt
•
Khaner is a big believer in the concept of “CEO family trees”, placing value on those that have been trained or worked under other successful CEO’s.
Khaner listed the signs of a successful turnaround, including:
• Cutting unprofitable sales
• Cutting headcount
• New senior managers
• Fix customer relationships
• CEO sets plan within 3 months
• Gross Margin up
• SG&A down
• Focus on Return on Capital
• Restructure Debt-Push out maturities.
One of Khaner’s favorite ideas is Starbucks (SBUX):
• Slowing new store openings
• Improving service
• Expects positive comps fiscal 2010
• ROIC growth 100-200 bps next 3+ years
• FCF $500-$750 million 3+ years
Candace King Weir and Amanda F. Weir, Paradigm Capital Management
Bottom-up Stock Picking Back in Fashion?
Candace King Weir and Amanda Weir presented the case for bottom-up stock picking, especially in the small cap universe, believing that in this space:
• Management is more accessible
• Business models are more easily understood
• Companies tend to be domestically based, and have less currency and commodity exposure
• Companies are more nimble, have ability to scale, and can react more quickly to changing events
Part of the Weir’s strategy involves frequent contact with management. They focus on one name at a time, and are agnostic to both sector weights and macro trends. They believe the current market provides unique opportunities for investors, and such markets occur only once every 1 or 2 decades.
One of their current favorites is retailer Wet Seal (WTSLA):
• Cheap clothes with a fashion edge
• $350 million market cap, $150 million in cash
• 575 stores (495 Wet Seal, 80 Arden B)
• Hired New merchandise managers
• Sees expansion opportunities for Arden B
Paul Isaac, CIO Cadogan Management
Investing as a Pari-Mutual Proposition
Isaac, a first-time VIC presenter, is a 40-year industry veteran. Issac presented the long case for Waste Management (WM):
• Largest waste management company in the US
• 273 landfills, 355 transfer stations
• Trading at 15 times trailing earnings, 14.5 times 2010 consensus estimates
• Trades at 6.8 X EV/EBITDA
• Return on Invested Capital: 8.5%
• Free Cash Flow Yield: 8%
• Dividend Yield : 3.7%
• Bought back 17 percent of outstanding shares over the past ten years; new buyback recently announced
• Barriers to new entry in this business due to regulation
• Permitting new sites is difficult
• Could trade up to 8 X EV/EBITDA
• Potential IRR up to 20%
• Rising operating and net profit margins
D3 War Stories: Practical Lessons About Building and Protecting Shareholder Value by Improving Corporate Governance
David Nierenberg, who has appeared at several other VIC’s including Pasadena this past May, led off the first day of the Congress. Nierenberg’s typically invest in busted microcap growth companies. His average holding period is 7 years, and there is 5 year lockup for investors.
The focus of this presentation was the importance of corporate governance. Nierenberg believes that much of the activism occurring these days is focused on the wrong things. He believes that putting a board in place that is capable and independent, focused on the real issues, and properly incented for the long-term can greatly improve potential company success.
Nierenberg highlighted three companies, including Move Inc (MOVE), Brooks Automation (BRKS), and Heartland Payment Systems (HPY). D3 currently has holdings in these companies, including 18.2% of Move, and 7.2% of Brooks.
Nierenberg believes that Heartland, a credit and bank card processor which currently trades for around $14.00, may ultimately be worth more than $ 40. Nierenberg cited the Company’s strong management, solid compound annual growth rates in revenue, EBITDA and EPS, and an overreaction to a security breach that sent the stock plummeting.
Nierenberg concluded with 3 points:
• Investing is not all about the numbers, it’s also about people and process
• Selling is not the only exit option (change can be brought about by major shareholders)
• In microcaps, large block positions and knowledge about governance can protect and build shareholder wealth.
Steve Dobson, CEO Amherst Securities
Fishing in a Poisoned Pond
Frequent VIC attendees have become accustomed to their bi-annual dose of bad news on the mortgage and housing front, and I am among many that are thankful for the honest portrayal. For the past two years, that somber topic has been delivered by Glen Tongue and Whitney Tilson, authors of “More Mortgage Meltdown”. Today, it was Steve Dobson’s turn.
Dobson’s expertise and analysis was a critical component of the book, and his candid portrayal of the continuing difficulties facing the residential mortgage market was sobering.
Among Dobson’s more frightening observations (and there were many):
• There are 8 million homes currently not paying their mortgage
• Once a borrower has missed 2 mortgage payments, foreclosure is all but inevitable
• The rate of recoveries is still declining
• The resolution process is grinding to a halt
• The amount of bank-owned real estate is falling, but that’s primarily because of a slowdown in the foreclosure process
• 29% to 50% of modified mortgages re-defaulted within six months
• 79% of all defaulted loans have a current loan to value (LTV) ratio above 120%
If there was any good news, Dobson reported that loss severities (recovery rates) have stabilized in all states.
Dobson concluded that:
• Loss severity will not increase substantially
• Losses will take longer to realize
• Loan modifications/Government programs to address the situation will evolve
David Einhorn, Chairman, Greenlight Capital
Liquor Before Beer, In the Clear
Einhorn opened his presentation with his thoughts on the importance of learning from bad decisions. He cited his 2005 IRA Sohn conference presentation on the merits of homebuilder NBC Holdings, which ultimately fell 40% as the homebuilding sector collapsed. Although the rest of the sector fell much further, an average of 70%, Einhorn learned the following:
• It is not reasonable to be agnostic about the big picture, a macro view is vital
• Even given the above statement, you can still be a stock picker
Einhorn went onto give a stirring speech about what he believes to be the current macro risks:
• The government is too focused on the short-term, too focused on getting re-elected.
• Too much focus on special interests (protection of banks, for one)
Einhorn believes that the lesson of the Lehman collapse, a company that he very successfully shorted, is that companies should not be so big that their collapse can jeopardize the entire financial system.
He went onto state that he has changed his view about the validity of owning gold, given its propensity to perform well not just during inflationary times, but when monetary policies are poor in general. In terms of form of ownership, Einhorn owns physical gold, believing that to be even more efficient than the ETF.
Joel Greenblatt, Managing Partner Gotham Capital
Formula Investing with a Value Mindset
Greenblatt, author of “The Little Book That Beats the Market”, presented a re-cap of his concept of the “Magic Formula”, which utilizes earnings yield and return on invested capital as the criteria to select stocks that will outperform. While he admitted that historical return on capital is backward looking, he stated the importance of estimating future ROC.
Greenblatt described two periods of underperformance by the strategy:
• 2/1/2006 through 12/1/2008 (34 months)
• 5/1/2002 through 6/1/2003 (13 months)
Despite his somewhat self deprecating depiction of the Magic Formula, the returns utilizing the strategy have been outstanding. For instance using back tested data, the strategy returned 291 percent or 14.6 percent annualized, for the 10 year period ended 5/30/2009. During the same period, the S&P 500 Index was down 2 percent (-.2 percent annualized). Furthermore, the Magic Formula has outperformed the market for ten of the past eleven years, through 9/30/2009.
Despite the simplicity of utilizing the Magic Formula, Greenblatt’s data suggests that it is not a good candidate to use for identifying short candidates. For instance, going long the top decile of Magic Formula companies and short the bottom decile substantially increases portfolio volatility, and does not enhance return.
Julian Robertson, Founder, Tiger Management
Question and Answer Session
Investing legend Julian Robertson took questions for a half hour; an extremely pleasant surprise for this Congress. Here are some of Robertson’s thoughts:
Concerns about the current state of affairs:
• Big concern is that we are still spending more than we earn, which is not sustainable. Debt must be paid back, and we are not even thinking about that. More focused on borrowing more from the Chinese, and hoping they won’t decide they have better things to do with their money.
On Energy:
• Although bullish on oil stocks, he is impressed by advances in solar energy. Believes that solar will continue to improve, wind power too, and this will ultimately help the environment and hurt oil companies.
On China:
• Might be a bubble
• Consumption not enough to pull the world out of recession
On Gold:
• An anti-gold bug—“none has been used since it was discovered”
On Norway:
• The most prosperous/sound country in the world
Companies he’s bullish on:
• Visa, Mastercard, Ryanair, Intel
What He’s Learned/Best Advice:
• Never be overconfident
• Don’t get overly enthusiastic about your business
Lloyd Khaner, General Partner Gotham, Kahner Capital
The Key to Turnarounds
First time presenter at the Value Investing Congress, Khaner, who has compounded 445.4% since 1991 (versus295.2% for the S&P 500), looks for the following attributes in potential investments:
• Unique management
• Strong decision making ability
• Avoid value traps
• Debt/Equity less than 70%
• Avoid dying industries
• Franchise companies with manageable debt
•
Khaner is a big believer in the concept of “CEO family trees”, placing value on those that have been trained or worked under other successful CEO’s.
Khaner listed the signs of a successful turnaround, including:
• Cutting unprofitable sales
• Cutting headcount
• New senior managers
• Fix customer relationships
• CEO sets plan within 3 months
• Gross Margin up
• SG&A down
• Focus on Return on Capital
• Restructure Debt-Push out maturities.
One of Khaner’s favorite ideas is Starbucks (SBUX):
• Slowing new store openings
• Improving service
• Expects positive comps fiscal 2010
• ROIC growth 100-200 bps next 3+ years
• FCF $500-$750 million 3+ years
Candace King Weir and Amanda F. Weir, Paradigm Capital Management
Bottom-up Stock Picking Back in Fashion?
Candace King Weir and Amanda Weir presented the case for bottom-up stock picking, especially in the small cap universe, believing that in this space:
• Management is more accessible
• Business models are more easily understood
• Companies tend to be domestically based, and have less currency and commodity exposure
• Companies are more nimble, have ability to scale, and can react more quickly to changing events
Part of the Weir’s strategy involves frequent contact with management. They focus on one name at a time, and are agnostic to both sector weights and macro trends. They believe the current market provides unique opportunities for investors, and such markets occur only once every 1 or 2 decades.
One of their current favorites is retailer Wet Seal (WTSLA):
• Cheap clothes with a fashion edge
• $350 million market cap, $150 million in cash
• 575 stores (495 Wet Seal, 80 Arden B)
• Hired New merchandise managers
• Sees expansion opportunities for Arden B
Paul Isaac, CIO Cadogan Management
Investing as a Pari-Mutual Proposition
Isaac, a first-time VIC presenter, is a 40-year industry veteran. Issac presented the long case for Waste Management (WM):
• Largest waste management company in the US
• 273 landfills, 355 transfer stations
• Trading at 15 times trailing earnings, 14.5 times 2010 consensus estimates
• Trades at 6.8 X EV/EBITDA
• Return on Invested Capital: 8.5%
• Free Cash Flow Yield: 8%
• Dividend Yield : 3.7%
• Bought back 17 percent of outstanding shares over the past ten years; new buyback recently announced
• Barriers to new entry in this business due to regulation
• Permitting new sites is difficult
• Could trade up to 8 X EV/EBITDA
• Potential IRR up to 20%
• Rising operating and net profit margins
Friday, October 09, 2009
Lazare Kaplan Trading Halt (LKI)
Perennial net/net Lazare Kaplan International, which we last profiled on July 8th, is currently in the throes of a trading halt on AMEX, as a result of its failure to file the Company's 10K in a timely manner. In fact, no shares have exchanged hands since September 15th. Yesterday, LKI submitted a plan to NYSE AMEX outlining how it intends to regain compliance with exchange listing requirements.
This type of situation is rarely, if ever good news. Lazare did not file its 10K in order to resolve "a material uncertainty concerning the collectability and recovery of certain assets, and "the Company's potential obligations under certain lines of credit and a guaranty". While the Company believes it will file it's 10K by 12/15/2009, delisting is certainly a possibility. Lazare has also stated intentions to trade over-the-counter if the Exchange does not approve the plan.
As we stated in the July piece, LKI was in a dangerous situation, and although we knew we were putting capital at risk, we still believed the Company had some potential value, in excess of the $1.16 per share we paid in March.
A brief conversation with CFO William Moryto last week yielded no new information, for obvious reasons.
While we presume there is bad news on the way for shareholders, we certainly would not mind being paid in inventory (polished and rough diamonds) in the event of a liquidation. It's too early to tell how this will end, but such situations are never surprising in the land of the net/nets.
Stay tuned.
*The author has a position in Lazare Kaplan(LKI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
This type of situation is rarely, if ever good news. Lazare did not file its 10K in order to resolve "a material uncertainty concerning the collectability and recovery of certain assets, and "the Company's potential obligations under certain lines of credit and a guaranty". While the Company believes it will file it's 10K by 12/15/2009, delisting is certainly a possibility. Lazare has also stated intentions to trade over-the-counter if the Exchange does not approve the plan.
As we stated in the July piece, LKI was in a dangerous situation, and although we knew we were putting capital at risk, we still believed the Company had some potential value, in excess of the $1.16 per share we paid in March.
A brief conversation with CFO William Moryto last week yielded no new information, for obvious reasons.
While we presume there is bad news on the way for shareholders, we certainly would not mind being paid in inventory (polished and rough diamonds) in the event of a liquidation. It's too early to tell how this will end, but such situations are never surprising in the land of the net/nets.
Stay tuned.
*The author has a position in Lazare Kaplan(LKI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Tuesday, October 06, 2009
Gannett on the Move
We typically shy away from large, or even mid caps on this site; the fact remains that they already get a great deal of coverage, and in our minds, they just aren't typically as interesting as the nano/micro cap markets.
That being said, over the past several months, we've been intrigued by some larger names that were all but written off for dead. Some appeared to be trading like cheap call options. Foremost on this list is publishing powerhouse Gannett (GCI), parent of the 2.1 million daily circulation USA Today.
Stung by a deep advertising slump, and declining newspaper circulation S&P 500 member Gannett fell to $1.95 last March. This was a $30 stock one year earlier, and topped out in the $90 range in 2004.
But advertising slumps can be brutal, and this was perhaps one of the worst on record. I lived through the last one in 2001-2002 as senior markets editor and writer for Bloomberg Personal Finance Magazine. I was perhaps naive to the ways of the publishing world, having jettisoned a management career at Bloomberg to enter a whole new world. As advertising worsened, Bloomberg Personal got thinner in terms of page count. Already losing money on the 400,000 circulation magazine, and with new management in place following Mike Bloomberg's election as New York City Mayor, the company pulled the plug on Bloomberg Personal. That's a day I'll never forget; I'm sure the publising veterans among the crowd called into the conference room for the announcement knew what was happening, but I certainly didn't. Ironically, the upcoming issue of Bloomberg Personal was finished, and I had the cover story for a magazine that was never released. I digress.
What attracted us to Gannett was the option-like price (the bulk of the position taken in July, at $3.13), for a company that we believed would survive. Perhaps it would never see $90 again, but at $3 and change it looked like a steal. So far, this appears to be a classic case of Mr. Market throwing the baby out with the bath water.
Gannet closed at $12.62 yesterday. Smarter investors might trim their position here, we have not...yet, anyway. Last week, company guidance suggested earnings of $.39- $.42 for Q3, versus consensus estimates of $.29. Full year 2010 consensus estimates are calling for $1.52 a share, so GCI currently trades at about 8 times forward earnings. Certainly not as cheap as it was a few months back, but still an interesting turn-around story.
We were concerned with Gannett's debt levels, currently around $4 billion in long-term debt with the completion of this week's senior note offering, but the Company has paid down a line of credit, pushing mnaturities into the future. This has at least bought the Company some time.
Trailing twelve month earnings have painted a bleak picture, with the Company losing $4.4 billion, or $19.32 per share. However, that includes more than $5.5 billion in non-cash charges, and Gannett has actually generated nearly $2.00 in free cash flow during that period.
The publishing world may never return to "normal", but we believe that Gannett, with more than 80 daily newspapers, 700 non-daily publications, 23 television stations, and a website that draws more than 20 million visitors per month, is a best of breed in the space.
Gannett Inc
Ticker: GCI
Price: $12.62
Market Cap: $2.96 billion
Cash: $104 million
Estimated Enterprise Value (EV): $6.4 billion
EV/EBITDA: 5.2
Price/Sales: .48
TTM FCF/share: $1.97
2010 Est EPS (consensus): $1.52
Forward PE: 8.3
Yield: 1.4%
*The author has a position in Gannett(GCI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
That being said, over the past several months, we've been intrigued by some larger names that were all but written off for dead. Some appeared to be trading like cheap call options. Foremost on this list is publishing powerhouse Gannett (GCI), parent of the 2.1 million daily circulation USA Today.
Stung by a deep advertising slump, and declining newspaper circulation S&P 500 member Gannett fell to $1.95 last March. This was a $30 stock one year earlier, and topped out in the $90 range in 2004.
But advertising slumps can be brutal, and this was perhaps one of the worst on record. I lived through the last one in 2001-2002 as senior markets editor and writer for Bloomberg Personal Finance Magazine. I was perhaps naive to the ways of the publishing world, having jettisoned a management career at Bloomberg to enter a whole new world. As advertising worsened, Bloomberg Personal got thinner in terms of page count. Already losing money on the 400,000 circulation magazine, and with new management in place following Mike Bloomberg's election as New York City Mayor, the company pulled the plug on Bloomberg Personal. That's a day I'll never forget; I'm sure the publising veterans among the crowd called into the conference room for the announcement knew what was happening, but I certainly didn't. Ironically, the upcoming issue of Bloomberg Personal was finished, and I had the cover story for a magazine that was never released. I digress.
What attracted us to Gannett was the option-like price (the bulk of the position taken in July, at $3.13), for a company that we believed would survive. Perhaps it would never see $90 again, but at $3 and change it looked like a steal. So far, this appears to be a classic case of Mr. Market throwing the baby out with the bath water.
Gannet closed at $12.62 yesterday. Smarter investors might trim their position here, we have not...yet, anyway. Last week, company guidance suggested earnings of $.39- $.42 for Q3, versus consensus estimates of $.29. Full year 2010 consensus estimates are calling for $1.52 a share, so GCI currently trades at about 8 times forward earnings. Certainly not as cheap as it was a few months back, but still an interesting turn-around story.
We were concerned with Gannett's debt levels, currently around $4 billion in long-term debt with the completion of this week's senior note offering, but the Company has paid down a line of credit, pushing mnaturities into the future. This has at least bought the Company some time.
Trailing twelve month earnings have painted a bleak picture, with the Company losing $4.4 billion, or $19.32 per share. However, that includes more than $5.5 billion in non-cash charges, and Gannett has actually generated nearly $2.00 in free cash flow during that period.
The publishing world may never return to "normal", but we believe that Gannett, with more than 80 daily newspapers, 700 non-daily publications, 23 television stations, and a website that draws more than 20 million visitors per month, is a best of breed in the space.
Gannett Inc
Ticker: GCI
Price: $12.62
Market Cap: $2.96 billion
Cash: $104 million
Estimated Enterprise Value (EV): $6.4 billion
EV/EBITDA: 5.2
Price/Sales: .48
TTM FCF/share: $1.97
2010 Est EPS (consensus): $1.52
Forward PE: 8.3
Yield: 1.4%
*The author has a position in Gannett(GCI). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Friday, October 02, 2009
Chromcraft Revington (CRC) Update
Shares of this tiny furniture manufacturer, which we profiled in June,have risen nearly 80 percent in the past three months. Chromcraft is a member of The Cheap Stocks 21 Net Net Index
As we indicated in our June piece, this is not a great business to be in. Net/Nets are typically somewhat ugly, a fact that is often reflected in the stock price. In Chromcraft's case, we saw some potentially interesting assets we believed were worth a great deal more than the sub $1 stock price.
Recent results demonstrated some progress by the Company, but are still nothing to write home about. Chromcraft lost $2.5 million for the second quarter, on sales of $14.6 million, versus a loss of $5.6 million on sales of $31.3 million for the same quarter last year. These results reflected cost cutting efforts by the Company, including the elimination of some product lines, and the consolidation of facilities.
The Company has generated $2.2 million in cash for the six months ended 6/30/2009, but $4.3 million in the first quarter alone. So, CRC burned $2 million during Q2, and ended the quarter with $3.1 million in cash, and no debt.
Current book value per share is $4.54, and there are some compelling tangible assets backstopping that figure, including the 560,000 square foot Senatobia, Mississipi manufacturing/distribution site (which sits on 100 acres), and the 519,000 square foot warehouse/distribution center in Delphi, Indiana.
The risks here are very evident, but the Company is not encumbered by debt. As always, be very cautious in net/net land.
Chromcraft Revington
Ticker:CRC
Price:$1.60
Avg volume: 11,800
Market Cap: $10 million
Book Value per share: $4.54
Shares Out: 6.1 million
NCAV:$18.02 million
NCAV/Market Cap: 1.8
*The author has a position in Chromcraft Revington(CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
As we indicated in our June piece, this is not a great business to be in. Net/Nets are typically somewhat ugly, a fact that is often reflected in the stock price. In Chromcraft's case, we saw some potentially interesting assets we believed were worth a great deal more than the sub $1 stock price.
Recent results demonstrated some progress by the Company, but are still nothing to write home about. Chromcraft lost $2.5 million for the second quarter, on sales of $14.6 million, versus a loss of $5.6 million on sales of $31.3 million for the same quarter last year. These results reflected cost cutting efforts by the Company, including the elimination of some product lines, and the consolidation of facilities.
The Company has generated $2.2 million in cash for the six months ended 6/30/2009, but $4.3 million in the first quarter alone. So, CRC burned $2 million during Q2, and ended the quarter with $3.1 million in cash, and no debt.
Current book value per share is $4.54, and there are some compelling tangible assets backstopping that figure, including the 560,000 square foot Senatobia, Mississipi manufacturing/distribution site (which sits on 100 acres), and the 519,000 square foot warehouse/distribution center in Delphi, Indiana.
The risks here are very evident, but the Company is not encumbered by debt. As always, be very cautious in net/net land.
Chromcraft Revington
Ticker:CRC
Price:$1.60
Avg volume: 11,800
Market Cap: $10 million
Book Value per share: $4.54
Shares Out: 6.1 million
NCAV:$18.02 million
NCAV/Market Cap: 1.8
*The author has a position in Chromcraft Revington(CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Saturday, September 26, 2009
Cheap Stocks 21 Net/Net Index In Positive Territory
It's been quite awhile since we published an update on the Cheap Stocks 21 Net/Net Index, an experiment we launched in February 2008. The purpose was to test the waters of net/net indexing--a concept we believe to be quite compelling.
At the time of launch, the quality of net/nets was subpar; not nearly as compelling as the opportunities we saw early in 2009. After the initial year, performance was somewhat disappointing, as the index was down 36%, versus -40% for the Russell Microcap Index.
Along the way, we did alter the rules of the index slightly. Instead of replacing comnpanies that were acquired, or filed for bankruptcy, we simply left the index as is, and any funds from acquisition were left in cash. We decided to take a set it and forget approach to what we believe is the first ever net/net index. The original index value was set at 100.
Along the way two companies, InFocus Corp, and Renovis were acquired, which resulted in cash of $4.59. Another company, Replidyne, merged with Cardiovascular systems, which we left in the index. Surprisingly, there has been just one company that has effectively gone under, Handelman, which is in the process of liquidation, and now represents just .01% of the Index.
Below are the current Index constituents, and their weights. Dominated by Adaptec and The Finish Line, this was one of the pitfalls of a cap-weighted index. Due to the experimental nature of this venture, that was fine with us, for now. Perhaps our next version will be equal weighted.
Current Cheap Stocks 21 Net Net Index Constituents
Finish Line Inc(FINL)27.13%
Retail-Apparel
Adaptec Inc(ADPT)22.17%
Computer Systems
Audiovox Corp(VOXX)8.8%
Electronics
Richardson Electronics(RELL)5.16%
Electronics Wholesale
Cash-4.59%
MediciNova Inc(MNOV)4.21%
Biotech
Anadys Pharmaceuticals Inc(ANDS)4.11%
Biotech
Nu Horizons Electronics(NUHC)4.06%
Electronics Wholesale
Pomeroy IT Solutions(PMRY)3.96%
IT
Ditech Networks(DITC)3.04%
Communication Equip
Parlux Fragrances(PARL)2.27%
Personal Products
Emerson Radio Corp(MSN)1.93%
Electronics
FSI International Inc(FSII)1.80%
Semiconductor Equip
Trans World Entertainment(TWMC)1.61%
Retail-Music and Video
Leadis Technology Inc(LDIS)1.58%
Semiconductor-Integrated Circuits
Tandy Brands Accessories Inc(TBAC)1.39%
Apparel, Footwear, Accessories
Cardiovasular Systems(CSII)1.06%
Biotech
Charles & Colvard Ltd(CTHR).62%
Jewel Wholesale
Chromcraft Revington Inc(CRC).51%
Furniture
Handleman Co(HDL) .01%
Music- Wholesale
Performance
The current index value is 100.32, so the Cheap Stocks Net Net Index is up .32% since its February 12, 2008 inception. During that same period, the Russell Microcap Index is down about 22%.
*The author has a position in Chromcraft Revington(CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
At the time of launch, the quality of net/nets was subpar; not nearly as compelling as the opportunities we saw early in 2009. After the initial year, performance was somewhat disappointing, as the index was down 36%, versus -40% for the Russell Microcap Index.
Along the way, we did alter the rules of the index slightly. Instead of replacing comnpanies that were acquired, or filed for bankruptcy, we simply left the index as is, and any funds from acquisition were left in cash. We decided to take a set it and forget approach to what we believe is the first ever net/net index. The original index value was set at 100.
Along the way two companies, InFocus Corp, and Renovis were acquired, which resulted in cash of $4.59. Another company, Replidyne, merged with Cardiovascular systems, which we left in the index. Surprisingly, there has been just one company that has effectively gone under, Handelman, which is in the process of liquidation, and now represents just .01% of the Index.
Below are the current Index constituents, and their weights. Dominated by Adaptec and The Finish Line, this was one of the pitfalls of a cap-weighted index. Due to the experimental nature of this venture, that was fine with us, for now. Perhaps our next version will be equal weighted.
Current Cheap Stocks 21 Net Net Index Constituents
Finish Line Inc(FINL)27.13%
Retail-Apparel
Adaptec Inc(ADPT)22.17%
Computer Systems
Audiovox Corp(VOXX)8.8%
Electronics
Richardson Electronics(RELL)5.16%
Electronics Wholesale
Cash-4.59%
MediciNova Inc(MNOV)4.21%
Biotech
Anadys Pharmaceuticals Inc(ANDS)4.11%
Biotech
Nu Horizons Electronics(NUHC)4.06%
Electronics Wholesale
Pomeroy IT Solutions(PMRY)3.96%
IT
Ditech Networks(DITC)3.04%
Communication Equip
Parlux Fragrances(PARL)2.27%
Personal Products
Emerson Radio Corp(MSN)1.93%
Electronics
FSI International Inc(FSII)1.80%
Semiconductor Equip
Trans World Entertainment(TWMC)1.61%
Retail-Music and Video
Leadis Technology Inc(LDIS)1.58%
Semiconductor-Integrated Circuits
Tandy Brands Accessories Inc(TBAC)1.39%
Apparel, Footwear, Accessories
Cardiovasular Systems(CSII)1.06%
Biotech
Charles & Colvard Ltd(CTHR).62%
Jewel Wholesale
Chromcraft Revington Inc(CRC).51%
Furniture
Handleman Co(HDL) .01%
Music- Wholesale
Performance
The current index value is 100.32, so the Cheap Stocks Net Net Index is up .32% since its February 12, 2008 inception. During that same period, the Russell Microcap Index is down about 22%.
*The author has a position in Chromcraft Revington(CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Tuesday, September 15, 2009
Catalyst Investment Research- Nobel Learning Communities (NLCI)
Hedge Fund Solutions, LLC's unique investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.
To view the latest report, on Nobel Learning Communities, please sign up for a Free 1 month Trial to Catalyst Investment Research.
To view the latest report, on Nobel Learning Communities, please sign up for a Free 1 month Trial to Catalyst Investment Research.
Tuesday, September 01, 2009
Steak 'n Shake (SNS) Primer: Cheap Stocks Guest Blogger Series
Today's post is the first(and hopefully not last)in a series of pieces written by guest bloggers. Today's guest is an investment analyst in the Philadelphia area. I've known him for a few years, and during that time, he's demonstrated an affinity for deep value. He's also been a long-time Cheap Stocks reader. When we first discussed his idea (Steak 'n Shake), I hadn't really ever considered the guest blogging concept. But, I'm happy to try new things here at Cheap Stocks, and give readers the benefit of the insights of others.
Today's guest blogger wishes to remain anonymous. This gave me great pause initially, until I remembered that I'd written this site anonymously for several years. He is also in the process of launching his own site Fresh, and we look forward to reading about his ideas.
The Birth of a Holding Company from the Town of Buffetville
Steak ‘n Shake (SNS)…May I take your order?
Management Direction (from 3Q09 10Q)
New management, during the fourth quarter of fiscal year 2008, enacted a change in strategic direction under which we began to operate in a manner designed to generate cash. Our long-term objective is to maximize intrinsic business value per share of the Company. (Intrinsic value is computed by taking all future cash flows into and out of the business and then discounting the resultant number at an appropriate interest rate.) Thus, our financial goal is to maximize free cash flow and return on invested capital. We regard capital allocation as immensely important to creating shareholder value. Steak n Shake is transforming into a holding company. Its basic premise is to reinvest cash generated from its operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company’s Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Sardar Biglari, Chairman and Chief Executive Officer.
Steak and Shake is a restaurant chain with system-wide sales of $700 Million and 486 units (413 company owned, 73 franchised), which is on the verge of evolving into a capital allocation vehicle.
Mr. Biglari (age 31) gained control of Steak ‘n Shake last year (after a drawn out proxy fight) and has since turned the company around by reducing expenses, curtailing capital expenditures, focusing on core products, and lowering prices --- which has resulted in positive free cash flow and increased guest traffic.
A few bullet points on SNS’s financial position as July 1st, 2009:
• Cash and cash equivalents are roughly $38MM
• Long term debt has essentially been eliminated, which should save roughly $1-2 MM/yr in interest costs (not considering the potential merger with Western Sizzlin (WEST – see Additional Information), which would add to the debt load and interest expense)
• $13.7 MM outstanding on a revolving credit facility at a rate of One Month LIBOR + 350 bps
• Operating expenses have been dramatically reduced from the prior period (Nine months ending July 1, 2008) by about $12 MM (according to Biglari there could be more reductions to come)
• Generated $41 MM in cash from operations for nine months ending 7/1/2009, $13 MM of that was related to income tax refunds that were received during the period
• Operating Cash Flows could approach $25-$30 MM annually going forward
• Maintenance Cap Ex. is expected to be roughly $5-6 MM annually (according to Biglari) as new company store openings will not be taking place
• SNS Market Cap = approximately $318 MM as of 8/28/2009
On top of the attractive financial metrics you have another layer of conservatism with management as they are value oriented, risk averse, transparent, shareholder friendly, and have the utmost integrity. In addition, “free cash flow coupons” will be redeployed to the greenest pastures rather than systematically into the business. This creates an added bonus as intrinsic value can grow at an above average rate.
In addition, SNS owns a lot of its real estate (Land and Buildings for 149 locations, 12 improved properties, and 16 parcels held for sale, carried at around $315 MM excluding improvements and depreciation, Capital lease obligations stand at $132 MM), which helps create a floor for the valuation and leaves the potential for resource conversion opportunities. Refranchising is also an option to generate cash and free up capital as SNS has many company owned restaurants.
SNS has historically generated strong cash inflows, but outflows were mismanaged and reinvested back into the company in the pursuit of sales growth with complete disregard for ROIC. A few years ago SNS was generating roughly $60 MM in operating cash flows, but it was squandered away by prior management.
Many successful capital allocaters started out in a similar way; however, not many had the type of cash flows and assets that Mr. Biglari has at his disposal. If you’re wondering if SNS is a viable business with a “moat” then I suggest you read this article written by Roger Ebert. Mr. Biglari recently said that he was even surprised by the strength of the brand after he took over.
Mr. Biglari’s record with his Investment Partnership (The Lion Fund – reminiscent of the Buffet Partnership) has been impressive and provides a paper trail for his capital allocation abilities. As of 12/31/2008, The Lion Fund (TLF) had outperformed the S&P 500 by 17% annually since inception (2000). One thing to note is that SNS and Western Sizzlin (WEST) represent over 50% of The Lion Fund. WEST has the bulk of its shareholder’s equity invested in SNS and Biglari has the majority of his net worth invested in TLF --- Interests are aligned.
So here you have a sizeable cash flow stream (relative to current market valuation), valuable assets, and an iconic brand in the hands of a capital allocator from the town of Buffetville --- who knows?...maybe good things can happen…
Additional Information:
Western Sizzlin, which was first entity where Mr. Biglari gained control, recently had their AGM. An intent to merge Steak and Shake and Western Sizzlin (Company Structure) was announced the same day. Here are the best notes I could find of the meeting.
Timeline of Biglari’s control endeavors.
Letter to SNS Shareholders (10/21/2008)
NYSE Opening Bell --- Same day as AGM and NASDAQ Stock Market Closing Bell (8/13/2009)
Western Sizzlin Corporation Rings The NASDAQ Stock Market Closing Bell --- Those are WEST shareholders who were there for the AGM in the back.
Sardar Biglari's Speech at the NASDAQ Stock Market Closing Bell
Corner of Berkshire & Fairfax Investor Message Board (They have a category dedicated to discussion about Sardar Biglari, Western Sizzlin, & Steak ‘n Shake)
*The author has positions in Western Sizzlin and Steak'n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Today's guest blogger wishes to remain anonymous. This gave me great pause initially, until I remembered that I'd written this site anonymously for several years. He is also in the process of launching his own site Fresh, and we look forward to reading about his ideas.
The Birth of a Holding Company from the Town of Buffetville
Steak ‘n Shake (SNS)…May I take your order?
Management Direction (from 3Q09 10Q)
New management, during the fourth quarter of fiscal year 2008, enacted a change in strategic direction under which we began to operate in a manner designed to generate cash. Our long-term objective is to maximize intrinsic business value per share of the Company. (Intrinsic value is computed by taking all future cash flows into and out of the business and then discounting the resultant number at an appropriate interest rate.) Thus, our financial goal is to maximize free cash flow and return on invested capital. We regard capital allocation as immensely important to creating shareholder value. Steak n Shake is transforming into a holding company. Its basic premise is to reinvest cash generated from its operating subsidiaries into any investments with the objective of achieving high risk-adjusted returns. Pursuant to a resolution of the Company’s Board of Directors on June 17, 2009, all investment and other capital allocation decisions are made for the Company by Sardar Biglari, Chairman and Chief Executive Officer.
Steak and Shake is a restaurant chain with system-wide sales of $700 Million and 486 units (413 company owned, 73 franchised), which is on the verge of evolving into a capital allocation vehicle.
Mr. Biglari (age 31) gained control of Steak ‘n Shake last year (after a drawn out proxy fight) and has since turned the company around by reducing expenses, curtailing capital expenditures, focusing on core products, and lowering prices --- which has resulted in positive free cash flow and increased guest traffic.
A few bullet points on SNS’s financial position as July 1st, 2009:
• Cash and cash equivalents are roughly $38MM
• Long term debt has essentially been eliminated, which should save roughly $1-2 MM/yr in interest costs (not considering the potential merger with Western Sizzlin (WEST – see Additional Information), which would add to the debt load and interest expense)
• $13.7 MM outstanding on a revolving credit facility at a rate of One Month LIBOR + 350 bps
• Operating expenses have been dramatically reduced from the prior period (Nine months ending July 1, 2008) by about $12 MM (according to Biglari there could be more reductions to come)
• Generated $41 MM in cash from operations for nine months ending 7/1/2009, $13 MM of that was related to income tax refunds that were received during the period
• Operating Cash Flows could approach $25-$30 MM annually going forward
• Maintenance Cap Ex. is expected to be roughly $5-6 MM annually (according to Biglari) as new company store openings will not be taking place
• SNS Market Cap = approximately $318 MM as of 8/28/2009
On top of the attractive financial metrics you have another layer of conservatism with management as they are value oriented, risk averse, transparent, shareholder friendly, and have the utmost integrity. In addition, “free cash flow coupons” will be redeployed to the greenest pastures rather than systematically into the business. This creates an added bonus as intrinsic value can grow at an above average rate.
In addition, SNS owns a lot of its real estate (Land and Buildings for 149 locations, 12 improved properties, and 16 parcels held for sale, carried at around $315 MM excluding improvements and depreciation, Capital lease obligations stand at $132 MM), which helps create a floor for the valuation and leaves the potential for resource conversion opportunities. Refranchising is also an option to generate cash and free up capital as SNS has many company owned restaurants.
SNS has historically generated strong cash inflows, but outflows were mismanaged and reinvested back into the company in the pursuit of sales growth with complete disregard for ROIC. A few years ago SNS was generating roughly $60 MM in operating cash flows, but it was squandered away by prior management.
Many successful capital allocaters started out in a similar way; however, not many had the type of cash flows and assets that Mr. Biglari has at his disposal. If you’re wondering if SNS is a viable business with a “moat” then I suggest you read this article written by Roger Ebert. Mr. Biglari recently said that he was even surprised by the strength of the brand after he took over.
Mr. Biglari’s record with his Investment Partnership (The Lion Fund – reminiscent of the Buffet Partnership) has been impressive and provides a paper trail for his capital allocation abilities. As of 12/31/2008, The Lion Fund (TLF) had outperformed the S&P 500 by 17% annually since inception (2000). One thing to note is that SNS and Western Sizzlin (WEST) represent over 50% of The Lion Fund. WEST has the bulk of its shareholder’s equity invested in SNS and Biglari has the majority of his net worth invested in TLF --- Interests are aligned.
So here you have a sizeable cash flow stream (relative to current market valuation), valuable assets, and an iconic brand in the hands of a capital allocator from the town of Buffetville --- who knows?...maybe good things can happen…
Additional Information:
Western Sizzlin, which was first entity where Mr. Biglari gained control, recently had their AGM. An intent to merge Steak and Shake and Western Sizzlin (Company Structure) was announced the same day. Here are the best notes I could find of the meeting.
Timeline of Biglari’s control endeavors.
Letter to SNS Shareholders (10/21/2008)
NYSE Opening Bell --- Same day as AGM and NASDAQ Stock Market Closing Bell (8/13/2009)
Western Sizzlin Corporation Rings The NASDAQ Stock Market Closing Bell --- Those are WEST shareholders who were there for the AGM in the back.
Sardar Biglari's Speech at the NASDAQ Stock Market Closing Bell
Corner of Berkshire & Fairfax Investor Message Board (They have a category dedicated to discussion about Sardar Biglari, Western Sizzlin, & Steak ‘n Shake)
*The author has positions in Western Sizzlin and Steak'n Shake. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Thursday, August 27, 2009
Maui Land and Pineapple Update
If there's anything we like to cover besides net/nets here at Cheap Stocks, it's real estate, more specifically, company's that own relatively large amounts of raw land, commercial property, or a combination of the two. My portfolio is chock full of these companies, from retailers such as Cabela's, to restauarants (Cracker Barrell, Denny's) to shipping company's (Alexander and Baldwin) to agriculture (JG Boswell and Limoneira), to name just a few.
Over the years, I've also sold out of some names as well. Maui Land and Pineapple is a great example. I continue to follow the company, however, looking for a re-entry point, or making a determination of whether I want to take a new position.
MLP, which owns 24,500 acres primarily in Maui, Hawaii, including 10.6 miles of ocean frontage with 3300 of lineal feet along sandy beaches, has fallen on hard times during the recession. The company recently reported a $54 million loss for the second quarter, which included more than $37 million in writedowns, $21.3 million of which represented a decrease in value of the Company’s investment in the Kapalua Bay resort. Clearly, the downturns in real estate prices and resort visitors has been a double whammy for MLP. The stock now trades at $6.22, down 79% from it's 52 week high of $29.69.
While there is still value in MLP, declining cash ($1.5 million) and debt ($60 million short-term, and $35 million long-term) complicate matters for this $50 million market cap company.
Some recent transactions, however, demonstrate the value of some of MLP's land. In March, the company sold its Plantation Golf Course for $50 million in cash. (It's a somewhat complicated transaction, for more detail, see note 10 in the most recent 10Q).
In March 2007, the Company sold the land underlying the Ritz-Carlton, Kapalua hotel. 49 acres, for $25 million in cash and a 21.4% interest in the Hotel JV. As of June 30, 2009, MLP's stake fell to 15.9% of the hotel, due to cash calls in which MLP did not participate.
A good portion of MLP's land is preserved, including the 8,304-acre Pu‘u Kukui Watershed Preserve, which is the largest private nature preserve in Hawai‘i, and the 3,307-acre Honolua-Mokule‘ia Marine Life Conservation District, both located in West Maui. An additional 2000 acres is used in the oompany's pineapple growing operation.
With a current enterprise value of about $145 million, the EV to acres calculation we are fond of works out to just over $5900. Of course, not all of MLP's land is as valuable as the ocean front property, and this calculation does include the preserved land.
We'll keep an eye on this company, it does have it's share of issues, but is interesting nonetheless. Keep in mind that average trading volume is just 35,000 shares/day, and Steve Case owns nearly 43% of the shares.
*The author does not have a position in Maui Land and Pineapple. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Over the years, I've also sold out of some names as well. Maui Land and Pineapple is a great example. I continue to follow the company, however, looking for a re-entry point, or making a determination of whether I want to take a new position.
MLP, which owns 24,500 acres primarily in Maui, Hawaii, including 10.6 miles of ocean frontage with 3300 of lineal feet along sandy beaches, has fallen on hard times during the recession. The company recently reported a $54 million loss for the second quarter, which included more than $37 million in writedowns, $21.3 million of which represented a decrease in value of the Company’s investment in the Kapalua Bay resort. Clearly, the downturns in real estate prices and resort visitors has been a double whammy for MLP. The stock now trades at $6.22, down 79% from it's 52 week high of $29.69.
While there is still value in MLP, declining cash ($1.5 million) and debt ($60 million short-term, and $35 million long-term) complicate matters for this $50 million market cap company.
Some recent transactions, however, demonstrate the value of some of MLP's land. In March, the company sold its Plantation Golf Course for $50 million in cash. (It's a somewhat complicated transaction, for more detail, see note 10 in the most recent 10Q).
In March 2007, the Company sold the land underlying the Ritz-Carlton, Kapalua hotel. 49 acres, for $25 million in cash and a 21.4% interest in the Hotel JV. As of June 30, 2009, MLP's stake fell to 15.9% of the hotel, due to cash calls in which MLP did not participate.
A good portion of MLP's land is preserved, including the 8,304-acre Pu‘u Kukui Watershed Preserve, which is the largest private nature preserve in Hawai‘i, and the 3,307-acre Honolua-Mokule‘ia Marine Life Conservation District, both located in West Maui. An additional 2000 acres is used in the oompany's pineapple growing operation.
With a current enterprise value of about $145 million, the EV to acres calculation we are fond of works out to just over $5900. Of course, not all of MLP's land is as valuable as the ocean front property, and this calculation does include the preserved land.
We'll keep an eye on this company, it does have it's share of issues, but is interesting nonetheless. Keep in mind that average trading volume is just 35,000 shares/day, and Steve Case owns nearly 43% of the shares.
*The author does not have a position in Maui Land and Pineapple. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks
following the date of this post.
Wednesday, August 12, 2009
Rising Tide Shrinks the Net/Net Universe: Top 5 by Market Cap
Without a doubt, the recent market "recovery" off March lows has had a dramatic effect in the land of misfit companies; more specifically, the number of net/nets is falling. This is not at all surprising; we've seen it happen several times before when markets recover.
There are still 140 or so net/nets with market caps greater than $5 million, but those at the upper end of the market cap spectrum are few and far between. Case and point, on February 19th, there were more than 320 such net/nets; 38 of which had market caps above $100 million. Currently, there are just 10 above $100 million.
The top 5 Net/Nets by market cap:
Adaptec
Ticker:ADPT
Price:$2.91
Market Cap:$350
NCAV:375
Market Cap/NCAV:.93
Cash/Share:$3.14
Opnext Inc
Ticker:OPXT
Price:$2.20
Market Cap:$195
NCAV:$200
Market Cap/NCAV:.975
Cash/Share:$1.87
Volt Information Sciences Inc
Ticker:VOL
Price:$8.95
Market Cap:$186
NCAV:$200
Market Cap/NCAV:.93
Cash/Share: $6.99
Audiovoxx
Ticker:VOXX
Price:$7.30
Market Cap:$167
NCAV:$212
NCAV/Market Cap:.79
Cash/Share:$2.73
Note: Audiovoxx seems to be a perennial net/net. Has been on the list for several years.
Silicon Graphics
Ticker:SGI
Price:$5.39
Market Cap:$161
NCAV:$200
NCAV/Market Cap:.81
Cash/Share:$5.82
Stay tuned. There's never a dull moment in the wonderful world of net/nets....
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
There are still 140 or so net/nets with market caps greater than $5 million, but those at the upper end of the market cap spectrum are few and far between. Case and point, on February 19th, there were more than 320 such net/nets; 38 of which had market caps above $100 million. Currently, there are just 10 above $100 million.
The top 5 Net/Nets by market cap:
Adaptec
Ticker:ADPT
Price:$2.91
Market Cap:$350
NCAV:375
Market Cap/NCAV:.93
Cash/Share:$3.14
Opnext Inc
Ticker:OPXT
Price:$2.20
Market Cap:$195
NCAV:$200
Market Cap/NCAV:.975
Cash/Share:$1.87
Volt Information Sciences Inc
Ticker:VOL
Price:$8.95
Market Cap:$186
NCAV:$200
Market Cap/NCAV:.93
Cash/Share: $6.99
Audiovoxx
Ticker:VOXX
Price:$7.30
Market Cap:$167
NCAV:$212
NCAV/Market Cap:.79
Cash/Share:$2.73
Note: Audiovoxx seems to be a perennial net/net. Has been on the list for several years.
Silicon Graphics
Ticker:SGI
Price:$5.39
Market Cap:$161
NCAV:$200
NCAV/Market Cap:.81
Cash/Share:$5.82
Stay tuned. There's never a dull moment in the wonderful world of net/nets....
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Friday, August 07, 2009
Back in the Good Old USA; Catalyst Investment Research in the Wall Street Journal
Your Cheap Stocks editor recently returned from a 10 day mission trip to the Dominican Republic. It was truly an eye opening experience. Thirty Americans and several Dominicans worked to clear a small piece of land, so that a church can be built on the site in the town of Haina. We used axes, shovels, pick axes, and machetes- possibly the greatest tool ever, and a must have in every garden shed- to get the job done. I come back very appreciative of the small things that we take for granted: clean, cold water, ice, toilet paper, a toilet that flushes, you name it. What the Dominicans we worked with lacked in material possessions, and many of the things we don't think we can live without, they more than made up for in their joy. Amazing people. As a side note, machete's were so popular with our group, that 18 brand new ones ($8.00 each) came home with us, in our checked luggage.
Hedge Fund Solution's Catalyst Investment Research in the Wall Street Journal
While I was away, the latest from Catalyst Investment Research (The Hedge Fund Solutions product that I've teamed up with Damien Park on), a special report on recent Steel Partners activity, was featured in the Wall Street Journal print and on-line editions.
Finally,it's back to work, and more regular postings. Stay tuned.
Hedge Fund Solution's Catalyst Investment Research in the Wall Street Journal
While I was away, the latest from Catalyst Investment Research (The Hedge Fund Solutions product that I've teamed up with Damien Park on), a special report on recent Steel Partners activity, was featured in the Wall Street Journal print and on-line editions.
Finally,it's back to work, and more regular postings. Stay tuned.
Wednesday, July 08, 2009
The Return of Lazare Kaplan (LKI)
Long-time Cheap Stocks readers may recall our many postings on diamond company Lazare Kaplan throughout the years. A perennial net/net, its a company that we owned for a 2 year period until February 2008, when we sold out at around $10. Truth is, we made a little money (26%), but the story had gotten dull, and we were convinced that LKI was just one of those companies that would forever trade below net current asset value.
Interestingly enough, in October 2007, Lazare anounced a bizarre 1 for 101 reverse stock split, followed by the buy out of any shareholders owning less than 1 post-split share, and then by an immediate 101 for 1 forward split. This was intended to reduce shareholder roles to save an estimated $25,000 per year in costs. At the time, we thought that the company was aiming to go dark. That has not happened.
In the months following our sale of LKI, the economy all but imploded, and LKI fell to as low as $1.05 per share, about 10% of our exit price. While a diamond company is not a great place to be during a recession, we were compelled to take a position in March, when the stock was at $1.16. We did so at great peril to our capital, given the company's declining performance, and ample debt.
The latest quarter tells the tale quite well. Revenue fell 49% from the same quarter last year, and LKI lost $3.6 million, or $.43 per share, versus income of $3.3 million, or $.40 per share. Clearly, not many diamonds change hands during a deep recession, when discretionary spending falls dramatically, and retailers become reluctant to carry inventory, especially expensive inventory. The company also has a lot of debt for you average $20 million market cap company (less than $10 million when we took our position): $36 million in short-term, and another $40 million long-term which is due in May, 2010. Although the company ended the quarter with $13.2 million in cash, this is a potentially dangerous situation, and not one that we'd normally get involved with.
But Lazare also has something on the books we believe to be quite valuable: namely an inventory of $125.7 million of rough ($36.6 million) and polished ($89.1 million) diamonds. Furthermore these diamonds are carried at the lower of cost or market. While we typically don't care for net/nets whose current assets are concentrated in inventories (or receivables)for that matter, this is the kind of inventory where we are happy to make an exception.
Of course further success, and company solvency for that matter, is dependent on an economic recovery. While diamond prices are starting to show signs of a recovery, the consumer is not there yet, and Lazare has many challenges ahead.
One little known, but interesting fact about LKI is that Chairman of the Board Maurice Templesman is perhaps better know as Jaqueline Kennedy Onassis' long time companion and son Leon serves as President of the company.
Lazare Kaplan Intl
Ticker: LKI
Price: $2.46
Shares Out: 8.25
Market Cap: $20.3
NCAV: $56.3
NCAV/Mkt Cap: 2.77
Tangible Book Value/Share: $11.46
Average daily volume:15,700
*The author has a position in Lazare Kaplan. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Interestingly enough, in October 2007, Lazare anounced a bizarre 1 for 101 reverse stock split, followed by the buy out of any shareholders owning less than 1 post-split share, and then by an immediate 101 for 1 forward split. This was intended to reduce shareholder roles to save an estimated $25,000 per year in costs. At the time, we thought that the company was aiming to go dark. That has not happened.
In the months following our sale of LKI, the economy all but imploded, and LKI fell to as low as $1.05 per share, about 10% of our exit price. While a diamond company is not a great place to be during a recession, we were compelled to take a position in March, when the stock was at $1.16. We did so at great peril to our capital, given the company's declining performance, and ample debt.
The latest quarter tells the tale quite well. Revenue fell 49% from the same quarter last year, and LKI lost $3.6 million, or $.43 per share, versus income of $3.3 million, or $.40 per share. Clearly, not many diamonds change hands during a deep recession, when discretionary spending falls dramatically, and retailers become reluctant to carry inventory, especially expensive inventory. The company also has a lot of debt for you average $20 million market cap company (less than $10 million when we took our position): $36 million in short-term, and another $40 million long-term which is due in May, 2010. Although the company ended the quarter with $13.2 million in cash, this is a potentially dangerous situation, and not one that we'd normally get involved with.
But Lazare also has something on the books we believe to be quite valuable: namely an inventory of $125.7 million of rough ($36.6 million) and polished ($89.1 million) diamonds. Furthermore these diamonds are carried at the lower of cost or market. While we typically don't care for net/nets whose current assets are concentrated in inventories (or receivables)for that matter, this is the kind of inventory where we are happy to make an exception.
Of course further success, and company solvency for that matter, is dependent on an economic recovery. While diamond prices are starting to show signs of a recovery, the consumer is not there yet, and Lazare has many challenges ahead.
One little known, but interesting fact about LKI is that Chairman of the Board Maurice Templesman is perhaps better know as Jaqueline Kennedy Onassis' long time companion and son Leon serves as President of the company.
Lazare Kaplan Intl
Ticker: LKI
Price: $2.46
Shares Out: 8.25
Market Cap: $20.3
NCAV: $56.3
NCAV/Mkt Cap: 2.77
Tangible Book Value/Share: $11.46
Average daily volume:15,700
*The author has a position in Lazare Kaplan. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Friday, July 03, 2009
Catalyst Investment Research- Lion's Gate Entertainment(LGF)
Hedge Fund Solutions, LLC's unique investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.
Click here to download a complimentary copy of our latest report, an analysis on Lion's Gate Entertainmnent(LGF).
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in LGF. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Click here to download a complimentary copy of our latest report, an analysis on Lion's Gate Entertainmnent(LGF).
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in LGF. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Thursday, June 18, 2009
Anatomy of a New Net/Net Position: Chromcraft Revington
Buying net/nets is sometimes an ugly business. It's often hard to justify sinking capital into a business that appears to be headed for the scrap heap. But part of being a net/net investor is knowing the risks inherrent in buying companies that have probably already seen their best days, are thinly traded shadows of their former selves; reduced merely to assets that you believe may worth at least a few times the current price.
Chromcraft Revington is a great example. A member of the Cheap Stocks 21 Net Net Index, the Indiana based furniture maker and distributor has seen sales fall for the past 6 consecutive years, from $214 million in 2002 to just $ 99 million in 2008, a 54% decrease. The company lost $26.5 million last year, or $5.79 per share. In the first quarter of 2009, sales dropped 39% from the same period last year, and the company lost another $3.2 million. Clearly, a bad situation made even worse by the economic environment of the past 18 months.
Greenbackd features an excellent analysis on Chromcraft back in April, making the bearish case. At the time, the company was all but out of cash, and Greenbackd laid out their reasons for exiting their Chromcraft position at $.48. Now trading for $.83, one of the few brightspots in the most recent quarter was the fact that the company raised cash, and ended the quarter with $5.2 million, or $.85 per share, primarily through inventory and account receivable reductions.
While the quarter end cash balance is no reason to jump for joy, if you believe that an economic recovery is under way, Chromcraft may have bought itself some time. Just how long is difficult to say; it depends on the company's ability to cut costs, scale back operations, and is dependent on an uptick in the economy.
What's intriguing about Chromcraft beyond the fact that it has no debt on the books (there are some operating leases, however, a total of $4.4 million through 2012), are the company's other assets. Chromcraft owns a 519,000 square foot warehouse/distribution center in Delphi Indiana, and a 560,000 square foot manufacturing/distribution site in Senatobia Mississippi, for a total of nearly 1.08 million square feet of space. The Senatobia site sits on 100 acres. Granted, probably not the most valuable locations for warehouse space, and commercial real estate is currently suffering, but these assets have value, nonetheless, and are unencumbered by debt.
With current assets of $30.6 million, and total liabilities of $10.3 million, Chromcraft's net current asset value (NCAV) was $20.3 million as as of April 4th, 2009, nearly 4 times market cap. Currently trading at just .25 times NCAV, tangible book value per share is $4.94.
Beyond the risks laid out previously, CRC is a tiny company, with very low trading volume. While we recently took a position in CRC, we did so understanding the risks involved. Proceed with caution.
Chromcraft Revington
Ticker:CRC
Price:$.83
Avg volume: 7,000
Market Cap: $5 million
Book Value per share: $4.94
Shares Out: 6.1 million
NCAV:$20.27 million
Market Cap: $5.08 million
NCAV/Market Cap: 3.99
*The author has a position in Chromcraft Revington (CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Chromcraft Revington is a great example. A member of the Cheap Stocks 21 Net Net Index, the Indiana based furniture maker and distributor has seen sales fall for the past 6 consecutive years, from $214 million in 2002 to just $ 99 million in 2008, a 54% decrease. The company lost $26.5 million last year, or $5.79 per share. In the first quarter of 2009, sales dropped 39% from the same period last year, and the company lost another $3.2 million. Clearly, a bad situation made even worse by the economic environment of the past 18 months.
Greenbackd features an excellent analysis on Chromcraft back in April, making the bearish case. At the time, the company was all but out of cash, and Greenbackd laid out their reasons for exiting their Chromcraft position at $.48. Now trading for $.83, one of the few brightspots in the most recent quarter was the fact that the company raised cash, and ended the quarter with $5.2 million, or $.85 per share, primarily through inventory and account receivable reductions.
While the quarter end cash balance is no reason to jump for joy, if you believe that an economic recovery is under way, Chromcraft may have bought itself some time. Just how long is difficult to say; it depends on the company's ability to cut costs, scale back operations, and is dependent on an uptick in the economy.
What's intriguing about Chromcraft beyond the fact that it has no debt on the books (there are some operating leases, however, a total of $4.4 million through 2012), are the company's other assets. Chromcraft owns a 519,000 square foot warehouse/distribution center in Delphi Indiana, and a 560,000 square foot manufacturing/distribution site in Senatobia Mississippi, for a total of nearly 1.08 million square feet of space. The Senatobia site sits on 100 acres. Granted, probably not the most valuable locations for warehouse space, and commercial real estate is currently suffering, but these assets have value, nonetheless, and are unencumbered by debt.
With current assets of $30.6 million, and total liabilities of $10.3 million, Chromcraft's net current asset value (NCAV) was $20.3 million as as of April 4th, 2009, nearly 4 times market cap. Currently trading at just .25 times NCAV, tangible book value per share is $4.94.
Beyond the risks laid out previously, CRC is a tiny company, with very low trading volume. While we recently took a position in CRC, we did so understanding the risks involved. Proceed with caution.
Chromcraft Revington
Ticker:CRC
Price:$.83
Avg volume: 7,000
Market Cap: $5 million
Book Value per share: $4.94
Shares Out: 6.1 million
NCAV:$20.27 million
Market Cap: $5.08 million
NCAV/Market Cap: 3.99
*The author has a position in Chromcraft Revington (CRC). This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.
Saturday, June 13, 2009
Catalyst Investment Research- Enzon Pharmaceuticals
Hedge Fund Solutions, LLC's recently launched investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.
Click here to download a complimentary copy of our latest report, an analysis on Enzon Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in ENZN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Click here to download a complimentary copy of our latest report, an analysis on Enzon Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in ENZN. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Tuesday, June 02, 2009
Catalyst Investment Research- Penwest Pharmaceuticals
Hedge Fund Solutions, LLC's recently launched investment research product highlights companies that could potentially generate outsized returns due to an activist investor's involvement.
Click here to download a complimentary copy of our latest report, an analysis on Penwest Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in PPCO. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Click here to download a complimentary copy of our latest report, an analysis on Penwest Pharmaceuticals.
Annual Subscriptions (a minimum of 24 reports/year) are now available. Please message research@hedgerelations.com if you are interested in more information.
*The author does not have a position in PPCO. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Tuesday, May 26, 2009
Cheap Stocks Interview: Art Patten, President of Symmetry Capital
We are fortunate to meet a lot of interesting people in the investment business. Whether it's through the Value Investing Congress, Real Money.com (where I am a contributor), Seeking Alpha, fellow deep value bloggers, or Cheap Stock subscribers, there are a great deal of very smart deep value players out there. We first met Art Patten, President of Symmetry Capital, through this website, and have had several meetings with him since then. His insights into the world of deep value micro-cap investing are very interesting, and his investment philosophy is complementary to what we espouse at Cheap Stocks,
We thought he'd be perfect for the first interview ever published on Cheap Stocks, and recently sat down with him.
1. How would you describe your investment approach and philosophy?
Our general investing philosophy is that market efficiency is not some well defined state, but rather a continuously unfolding process that is impeded by various institutional, structural, psychological and other factors. That provides a suitable foundation for both passive and active styles of investing. In our active investing, we're contrarian and opportunistic. We have a deep value, small/micro cap bias, but there are minimal constraints on what we can own, thus the label on our Opportunistic Portfolio. Since value is a function of the price you pay for something versus the cash flows you expect to receive in the future, we have no problem being a bit eclectic in our security selection. If we come across a story that makes sense, or find one that fits into a larger investment thesis, and the related asset appears to be under valued, we'll try to fit it into our portfolio. We're also public policy junkies, and incorporate a fair amount of top down analysis into our process.
Our business philosophy is to work and invest intelligently, to put clients' interests absolutely first, and to try to do the right thing for capital markets whenever possible. Unlike much of the industry, we don't want to work our tails off (or claim to!) in the pursuit of 100 or 200 basis points of long term out performance, even though the compensation tends to be better. To play that game, you have to be willing to convince your clients pay you an active management fee for index like returns or worse. We won't do that. We won't ask clients to pay us an active management fee to play a loser's game on their behalves. To earn our active management fees, we try to stack the odds of success in our favor as much as possible, which we do by exploiting certain institutional and structural market factors – we're attracted to securities with low or no analyst or sell side coverage, low prices and/or market caps, turnaround stories, a recent emergence from bankruptcy, and so on. Those types of factors will tend to keep large buyers, the financial press, and hot dollars at bay while we do our homework. Ideally, we'll find and invest in things that eventually attract those folks, to whom we'll happily sell once our thesis has played out. We're skittish about momentum and crowd following, and if we aren't the first to the party, we at least try to be early, or join in when no one else is willing to, and leave when it starts to get crowded. That's where we tend to find the fattest, juiciest risk premia. It's risky, but over the long run, we think it offers high relative returns, and attractive risk adjusted returns. Our approach probably limits the scalability of what we do, but that's OK. We love the work, and we're confident that we're doing the right thing, both for our clients and for the investment profession. Until we start facing Warren Buffet's problem of being too big to go fishing in small ponds, we'll stick to our knitting.
2. How have you gone about building Symmetry’s Opportunistic Portfolio?
My professional background is in institutional portfolio design and management, so we're always thinking about the portfolio as a whole, about how any one piece fits with all the others, and what the net effects are likely to be. In normal times, we're relatively concentrated, perhaps 10-20 holdings, but in the fourth quarter of 2008 and the first quarter of this year, we saw so many companies go on fire sale that we ended up with quite a few more than that in the portfolio. We've been careful to avoid becoming closet index huggers. Something still has to look pretty cheap for us to invest. We now have around 50 holdings, including some high yield corporate debt and convertibles. The debt securities make up roughly 25% of the portfolio, and most of them mature in 2010-2013, which made sense to us from a top down perspective. We believe that after one or two years of healthy upside, equity markets will encounter some serious chop. If all goes well with the debt holdings, our clients will have some fresh cash to put to work as that paper matures, with a nice return of principal in the meantime. We didn't expect to have that large of a stake in debt securities, but I'm proud to say that we were true to our active strategy's name – we were very opportunistic in late 2008 and early 2009, which led us to credit as well as equity markets.
3. What is your current macro view on the markets, and how has that manifested itself in the construction of this portfolio?
We think a lot about the policy environment when developing our outlook. We find most comparisons to the Great Depression overblown, primarily because today's global monetary system is so different from the one that existed then. If the world's central banks managed to push the nominal price of gold to $500 or less and keep it there, and if globalization came to a sudden screeching halt, then we would look to the early 1930s for guidance. Until then, we're still in a post World War II economy. We've been saying for some time that we're seeing a repeat of the 1970s, with some early 1980s flavors and a few important differences. In the seventies, harmful economic policies were compensated for with easy monetary policy, which caused domestic business cycle and price level volatility, and fostered marginal investment in faster growing places like Germany, Japan, emerging Asia, and others. The current episode is a lot like that period, but with three important differences – globally tradable goods like commodities are now a much smaller factor in the domestic price level, U.S. demographics are much different, and the U.S. is unwinding a massive credit expansion and debt overhang.
Although primarily remembered as a decade of stagflation, the 1970s was actually a decade of fits and starts, with periods of inflation, deflation, rising and falling employment, and volatile financial markets and business cycles. We don't expect to see the same kind of domestic price level volatility this time around for the reasons I just mentioned, but inflation will take a toll in some parts of the world, especially in areas where tradable goods like commodities are still a large component of spending, and where households, and in some cases governments, are under severe financial strain. We wouldn't be surprised to see more food riots in emerging markets in the years ahead, as we did in 2008. And like the 1970s, we definitely expect to see rising volatility in economic output, worldwide. The dramatic contraction in the fourth quarter of 2008 was a powerful example, and the coming years will be a stark contrast to the “Great Moderation” of recent decades. Volatility will be made worse to the extent that policymakers foster economic uncertainty, as this makes investment decisions that much harder for businesses to commit to. Most importantly, if our tax and regulatory competitiveness continues to decline relative to the rest of the world, we are likely to see another relatively jobless recovery in the U.S. That will tend to work against domestic asset values, including the value of human capital, and it will hamper the country's capacity to fulfill on looming commitments like entitlement spending.
That being said, we think that the actual policies that come out of Washington will be better than is sometimes feared, a sentiment that might have contributed to the rally off of the March lows. However, it remains to be seen whether policy will be constructive or destructive on net. For example, while health care reform is properly described as aiming to reduce a significant drag on business, this rarely leads to a broader discussion about how to make the U.S. a more attractive destination for business investment. And it's all but guaranteed that the cost of government as a percentage of GDP will rise in coming years, perhaps decades, to levels not seen in half a century. The policy outlook becomes all the more important when you consider that the Democratic party looks likely to consolidate its control in coming years. That's another contrast to the 1970s. This is due not only to President Obama's charisma, but also to the Republican party's state of utter disrepair. There is a very high probability that Senate Democrats will expand their super majority in the 2010 elections, which leads us to believe that centrist and conservative Democrats will be the best hope for sound and rational economic policies. If they perform reasonably, the Republican party could wander the political wilderness for some time. So there's going to be an ever present risk of the more economically harmful ideas in the Democrats' tent gaining traction.
As far as actual market data go, it looks to us like we are going to see an unexpectedly strong upswing in GDP in coming quarters, but with significant uncertainty beyond 2010. Our biggest concern, which seems to be more than just a remote possibility, is subsequent waves of credit spasms. We don't expect anything like the post-Lehman environment, but if our jobless recovery prediction works out, there's still plenty of residential, consumer, and credit debt that has to be worked out. That's going to require some significant investments by debt servicing businesses, which might not have a positive net value. It's going to divert a good deal of resources that might have been better invested elsewhere. And without expanding or at least normalizing household incomes, we could see a significant wave of chapter seven filings before everything's said and done. We don't know how the ultimate costs will be shared among banks, taxpayers, and private investors, but without meaningful job growth, this overhang will be a stubborn drag on the domestic economy. In parts of the world where those factors are not in place or not as severe, we expect better economic performance in coming years – not decoupling per se, but countries with competitive economic policies and more attractive demographics should outperform in the years ahead.
In our portfolio, this outlook manifests itself in several ways. For example, we aren't shy about investing overseas, including emerging markets, although we currently do so through USD denominated securities like ADRs. We also think exposure to cyclicals like industrials, technology, and energy makes sense given the state of leading indicators and some of the values we're seeing in our favorite areas of the market. We think commodity producers will see a period of renewed strength, if not this year, then in 2010. And we like having debt securities in the portfolio for the diversification and relative stability they should provide, expected returns on principal from depressed levels, and expected cash flows, which we will put to work as new opportunities present themselves.
4. When will you sell out of a name?
When the market has proven us right or wrong. Because of our portfolio mindset, we will trim a position when it exceeds a specified threshold, or bring it back to weight if it has fallen in value and still makes sense to us, as long as the trading expense makes economic sense. But the decision to close a position out entirely is based upon expected upside relative to potential downside, and importantly, on the opportunity cost implied by expected returns on competing opportunities in our universe. We prefer to invest for the long term, but being opportunistic sometimes entails a shorter holding period. If we're lucky enough to have a story work out in short order, we'll close it out. We also consider hedging when cost effective hedges are available, but that's often not the case with the stuff we buy.
5. What are your current top holdings?
A couple of busted but healing convertibles issued by small energy companies make up about 13% of the portfolio combined, and we believe they still have significant upside. We also have about a 6% stake in Royce's Micro Cap Trust (RMT), which we use as a proxy for the portfolio when appropriate, and when available at a discount to NAV. For example, if a retail client has a marginal amount of cash to invest, and they pay per trade rather than per share commissions, we'll invest in a proxy rather than across multiple portfolio names, as that can generate significant savings for a client. Our largest single equity positions are in Thermadyne (THMD) and Himax (HIMX), at roughly 5% and 4%, respectively.
6. What led you to take positions in Thermadyne and Himax?
Thermadyne is a Saint Louis based global producer of welding and cutting tools and equipment. It's been a long term holding, and a company that I've personally followed since they emerged from Chapter 11 bankruptcy in 2003, after a string of highly leveraged and poorly integrated acquisitions in the 1990s. One of our favorite return recipes is a company emerging from oblivion, completely off of Wall Street's radar, with a product or service that's likely to see reasonable demand or better, and a management team capable of executing a lasting turnaround. Thermadyne definitely meets those criteria in our view, although the shares have taken us on a bit of a roller coaster ride, and they're not without risk going forward. As an industrial company, they are heavily exposed to the business cycle, especially steel demand, and they carry a good deal of leverage, with assets of three times book value, and debt to market cap over five. However, the forward looking market indicators we watch are supportive of a cyclical recovery, and we believe their international sales will continue to grow – they were up 15% in 2008 - and that they should see some benefit from domestic infrastructure expenditures beginning in 2010. Most importantly, their operational trajectory continues to impress us. Since 2004, sales have increased at 7.5% per year, cash flow from operations by an average of $7.75M annually, despite capex rising at 6% per year, and the most recent quarter's free cash flow yield was around eight percent. Performance wise, they still have some catching up to do to with their closest competitors. But at a price to sales ratio of 0.10, and with their current management team, we believe they have plenty of raw material to work with.
Himax is a Taiwan based provider of flat screen video display components. This is a somewhat contrarian play on flat screen demand, highly speculative, in a very competitive industry, and with some complex interrelationships between a key supplier and the CEO, and customers who are also minority investors. We like that the company has consistently invested in R&D in an attempt to expand into other product markets, including projection and other displays. And while the trailing dividend yield is probably not indicative for the coming year, we feel that it does provide meaningful information about management's and the board's dividend philosophy and the likely direction of future dividend policy. The voucher component of the Chinese government's stimulus plan is also expected to be supportive of the industry, although we like the story regardless. We could have bought a stock like Corning (GLW) as a “safer” blue chip play on flat panel displays, but Himax was a better fit for our approach – it's much smaller, and appeared to be more deeply undervalued and offer more attractive cash flows to shareholders – it's also an ADR selling in low single digits, which meant fewer institutional buyers to compete with as we entered the position.
7. Are you seeing any opportunities in the market today, and if so, where?
Nothing like we saw in March, but there are still opportunities. Equities as an asset class are more compelling than they've been in years, and based on early cycle indicators, we think that small cap equities are in a sweet spot. We also think there are still plenty of interesting net-net and real asset ideas out there, as you continue to highlight.
8. What do investors need to know about investing in deep-value micro cap companies?
Be skeptical, do your homework, and know how much you can afford to risk. That last one is really critical. We're careful to assess suitability for individual investors in our Opportunistic Portfolio, as this isn't the kind of approach that people should put all of their assets into. Ideally, people will only invest in volatile securities with surplus funds, funds that exceed their current and future liabilities. If people insist on speculating, being skeptical and doing the homework become even more critical.
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
We thought he'd be perfect for the first interview ever published on Cheap Stocks, and recently sat down with him.
1. How would you describe your investment approach and philosophy?
Our general investing philosophy is that market efficiency is not some well defined state, but rather a continuously unfolding process that is impeded by various institutional, structural, psychological and other factors. That provides a suitable foundation for both passive and active styles of investing. In our active investing, we're contrarian and opportunistic. We have a deep value, small/micro cap bias, but there are minimal constraints on what we can own, thus the label on our Opportunistic Portfolio. Since value is a function of the price you pay for something versus the cash flows you expect to receive in the future, we have no problem being a bit eclectic in our security selection. If we come across a story that makes sense, or find one that fits into a larger investment thesis, and the related asset appears to be under valued, we'll try to fit it into our portfolio. We're also public policy junkies, and incorporate a fair amount of top down analysis into our process.
Our business philosophy is to work and invest intelligently, to put clients' interests absolutely first, and to try to do the right thing for capital markets whenever possible. Unlike much of the industry, we don't want to work our tails off (or claim to!) in the pursuit of 100 or 200 basis points of long term out performance, even though the compensation tends to be better. To play that game, you have to be willing to convince your clients pay you an active management fee for index like returns or worse. We won't do that. We won't ask clients to pay us an active management fee to play a loser's game on their behalves. To earn our active management fees, we try to stack the odds of success in our favor as much as possible, which we do by exploiting certain institutional and structural market factors – we're attracted to securities with low or no analyst or sell side coverage, low prices and/or market caps, turnaround stories, a recent emergence from bankruptcy, and so on. Those types of factors will tend to keep large buyers, the financial press, and hot dollars at bay while we do our homework. Ideally, we'll find and invest in things that eventually attract those folks, to whom we'll happily sell once our thesis has played out. We're skittish about momentum and crowd following, and if we aren't the first to the party, we at least try to be early, or join in when no one else is willing to, and leave when it starts to get crowded. That's where we tend to find the fattest, juiciest risk premia. It's risky, but over the long run, we think it offers high relative returns, and attractive risk adjusted returns. Our approach probably limits the scalability of what we do, but that's OK. We love the work, and we're confident that we're doing the right thing, both for our clients and for the investment profession. Until we start facing Warren Buffet's problem of being too big to go fishing in small ponds, we'll stick to our knitting.
2. How have you gone about building Symmetry’s Opportunistic Portfolio?
My professional background is in institutional portfolio design and management, so we're always thinking about the portfolio as a whole, about how any one piece fits with all the others, and what the net effects are likely to be. In normal times, we're relatively concentrated, perhaps 10-20 holdings, but in the fourth quarter of 2008 and the first quarter of this year, we saw so many companies go on fire sale that we ended up with quite a few more than that in the portfolio. We've been careful to avoid becoming closet index huggers. Something still has to look pretty cheap for us to invest. We now have around 50 holdings, including some high yield corporate debt and convertibles. The debt securities make up roughly 25% of the portfolio, and most of them mature in 2010-2013, which made sense to us from a top down perspective. We believe that after one or two years of healthy upside, equity markets will encounter some serious chop. If all goes well with the debt holdings, our clients will have some fresh cash to put to work as that paper matures, with a nice return of principal in the meantime. We didn't expect to have that large of a stake in debt securities, but I'm proud to say that we were true to our active strategy's name – we were very opportunistic in late 2008 and early 2009, which led us to credit as well as equity markets.
3. What is your current macro view on the markets, and how has that manifested itself in the construction of this portfolio?
We think a lot about the policy environment when developing our outlook. We find most comparisons to the Great Depression overblown, primarily because today's global monetary system is so different from the one that existed then. If the world's central banks managed to push the nominal price of gold to $500 or less and keep it there, and if globalization came to a sudden screeching halt, then we would look to the early 1930s for guidance. Until then, we're still in a post World War II economy. We've been saying for some time that we're seeing a repeat of the 1970s, with some early 1980s flavors and a few important differences. In the seventies, harmful economic policies were compensated for with easy monetary policy, which caused domestic business cycle and price level volatility, and fostered marginal investment in faster growing places like Germany, Japan, emerging Asia, and others. The current episode is a lot like that period, but with three important differences – globally tradable goods like commodities are now a much smaller factor in the domestic price level, U.S. demographics are much different, and the U.S. is unwinding a massive credit expansion and debt overhang.
Although primarily remembered as a decade of stagflation, the 1970s was actually a decade of fits and starts, with periods of inflation, deflation, rising and falling employment, and volatile financial markets and business cycles. We don't expect to see the same kind of domestic price level volatility this time around for the reasons I just mentioned, but inflation will take a toll in some parts of the world, especially in areas where tradable goods like commodities are still a large component of spending, and where households, and in some cases governments, are under severe financial strain. We wouldn't be surprised to see more food riots in emerging markets in the years ahead, as we did in 2008. And like the 1970s, we definitely expect to see rising volatility in economic output, worldwide. The dramatic contraction in the fourth quarter of 2008 was a powerful example, and the coming years will be a stark contrast to the “Great Moderation” of recent decades. Volatility will be made worse to the extent that policymakers foster economic uncertainty, as this makes investment decisions that much harder for businesses to commit to. Most importantly, if our tax and regulatory competitiveness continues to decline relative to the rest of the world, we are likely to see another relatively jobless recovery in the U.S. That will tend to work against domestic asset values, including the value of human capital, and it will hamper the country's capacity to fulfill on looming commitments like entitlement spending.
That being said, we think that the actual policies that come out of Washington will be better than is sometimes feared, a sentiment that might have contributed to the rally off of the March lows. However, it remains to be seen whether policy will be constructive or destructive on net. For example, while health care reform is properly described as aiming to reduce a significant drag on business, this rarely leads to a broader discussion about how to make the U.S. a more attractive destination for business investment. And it's all but guaranteed that the cost of government as a percentage of GDP will rise in coming years, perhaps decades, to levels not seen in half a century. The policy outlook becomes all the more important when you consider that the Democratic party looks likely to consolidate its control in coming years. That's another contrast to the 1970s. This is due not only to President Obama's charisma, but also to the Republican party's state of utter disrepair. There is a very high probability that Senate Democrats will expand their super majority in the 2010 elections, which leads us to believe that centrist and conservative Democrats will be the best hope for sound and rational economic policies. If they perform reasonably, the Republican party could wander the political wilderness for some time. So there's going to be an ever present risk of the more economically harmful ideas in the Democrats' tent gaining traction.
As far as actual market data go, it looks to us like we are going to see an unexpectedly strong upswing in GDP in coming quarters, but with significant uncertainty beyond 2010. Our biggest concern, which seems to be more than just a remote possibility, is subsequent waves of credit spasms. We don't expect anything like the post-Lehman environment, but if our jobless recovery prediction works out, there's still plenty of residential, consumer, and credit debt that has to be worked out. That's going to require some significant investments by debt servicing businesses, which might not have a positive net value. It's going to divert a good deal of resources that might have been better invested elsewhere. And without expanding or at least normalizing household incomes, we could see a significant wave of chapter seven filings before everything's said and done. We don't know how the ultimate costs will be shared among banks, taxpayers, and private investors, but without meaningful job growth, this overhang will be a stubborn drag on the domestic economy. In parts of the world where those factors are not in place or not as severe, we expect better economic performance in coming years – not decoupling per se, but countries with competitive economic policies and more attractive demographics should outperform in the years ahead.
In our portfolio, this outlook manifests itself in several ways. For example, we aren't shy about investing overseas, including emerging markets, although we currently do so through USD denominated securities like ADRs. We also think exposure to cyclicals like industrials, technology, and energy makes sense given the state of leading indicators and some of the values we're seeing in our favorite areas of the market. We think commodity producers will see a period of renewed strength, if not this year, then in 2010. And we like having debt securities in the portfolio for the diversification and relative stability they should provide, expected returns on principal from depressed levels, and expected cash flows, which we will put to work as new opportunities present themselves.
4. When will you sell out of a name?
When the market has proven us right or wrong. Because of our portfolio mindset, we will trim a position when it exceeds a specified threshold, or bring it back to weight if it has fallen in value and still makes sense to us, as long as the trading expense makes economic sense. But the decision to close a position out entirely is based upon expected upside relative to potential downside, and importantly, on the opportunity cost implied by expected returns on competing opportunities in our universe. We prefer to invest for the long term, but being opportunistic sometimes entails a shorter holding period. If we're lucky enough to have a story work out in short order, we'll close it out. We also consider hedging when cost effective hedges are available, but that's often not the case with the stuff we buy.
5. What are your current top holdings?
A couple of busted but healing convertibles issued by small energy companies make up about 13% of the portfolio combined, and we believe they still have significant upside. We also have about a 6% stake in Royce's Micro Cap Trust (RMT), which we use as a proxy for the portfolio when appropriate, and when available at a discount to NAV. For example, if a retail client has a marginal amount of cash to invest, and they pay per trade rather than per share commissions, we'll invest in a proxy rather than across multiple portfolio names, as that can generate significant savings for a client. Our largest single equity positions are in Thermadyne (THMD) and Himax (HIMX), at roughly 5% and 4%, respectively.
6. What led you to take positions in Thermadyne and Himax?
Thermadyne is a Saint Louis based global producer of welding and cutting tools and equipment. It's been a long term holding, and a company that I've personally followed since they emerged from Chapter 11 bankruptcy in 2003, after a string of highly leveraged and poorly integrated acquisitions in the 1990s. One of our favorite return recipes is a company emerging from oblivion, completely off of Wall Street's radar, with a product or service that's likely to see reasonable demand or better, and a management team capable of executing a lasting turnaround. Thermadyne definitely meets those criteria in our view, although the shares have taken us on a bit of a roller coaster ride, and they're not without risk going forward. As an industrial company, they are heavily exposed to the business cycle, especially steel demand, and they carry a good deal of leverage, with assets of three times book value, and debt to market cap over five. However, the forward looking market indicators we watch are supportive of a cyclical recovery, and we believe their international sales will continue to grow – they were up 15% in 2008 - and that they should see some benefit from domestic infrastructure expenditures beginning in 2010. Most importantly, their operational trajectory continues to impress us. Since 2004, sales have increased at 7.5% per year, cash flow from operations by an average of $7.75M annually, despite capex rising at 6% per year, and the most recent quarter's free cash flow yield was around eight percent. Performance wise, they still have some catching up to do to with their closest competitors. But at a price to sales ratio of 0.10, and with their current management team, we believe they have plenty of raw material to work with.
Himax is a Taiwan based provider of flat screen video display components. This is a somewhat contrarian play on flat screen demand, highly speculative, in a very competitive industry, and with some complex interrelationships between a key supplier and the CEO, and customers who are also minority investors. We like that the company has consistently invested in R&D in an attempt to expand into other product markets, including projection and other displays. And while the trailing dividend yield is probably not indicative for the coming year, we feel that it does provide meaningful information about management's and the board's dividend philosophy and the likely direction of future dividend policy. The voucher component of the Chinese government's stimulus plan is also expected to be supportive of the industry, although we like the story regardless. We could have bought a stock like Corning (GLW) as a “safer” blue chip play on flat panel displays, but Himax was a better fit for our approach – it's much smaller, and appeared to be more deeply undervalued and offer more attractive cash flows to shareholders – it's also an ADR selling in low single digits, which meant fewer institutional buyers to compete with as we entered the position.
7. Are you seeing any opportunities in the market today, and if so, where?
Nothing like we saw in March, but there are still opportunities. Equities as an asset class are more compelling than they've been in years, and based on early cycle indicators, we think that small cap equities are in a sweet spot. We also think there are still plenty of interesting net-net and real asset ideas out there, as you continue to highlight.
8. What do investors need to know about investing in deep-value micro cap companies?
Be skeptical, do your homework, and know how much you can afford to risk. That last one is really critical. We're careful to assess suitability for individual investors in our Opportunistic Portfolio, as this isn't the kind of approach that people should put all of their assets into. Ideally, people will only invest in volatile securities with surplus funds, funds that exceed their current and future liabilities. If people insist on speculating, being skeptical and doing the homework become even more critical.
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Thursday, May 14, 2009
Notes From Day 2: Value Investing Congress West
William Waller & Jason Stock-M3 Funds
The U.S. Banking Sector: Chaos & Opportunity
M3 was founded in 2007, and invests (long and short) in small and mid cap names in the US bank and thrift sector. There are 1300 publicly traded banks, and 93% have market caps less than $500 million. Stock presented his view of the current state of the banking sector:
• Significantly undercapitalized
• Credit quality still deteriorating
• More bank failures
• Unemployment rate will continue to rise
• Commercial real estate is in trouble
Stock believes that there will be in excess of 150 bank failures in 2009. Stull, he and Waller are still finding opportunity on the long side, and look for the following:
• Low Price/Tangible Book
• Excess capital
• Low loan/deposits
• Attractive markets
• Bearish management team
• Share repurchase plan
• Attractive deposit base
One long name Waller and Stock like: First of Long Island (FLIC: $21.00)
• 140% of tangible book
• 11 times LTM earnings
• Excess Capital; 8.5% tangible equity/assets
• 68.5% loan to deposit ratio
• $ 1billion high quality deposits with 1% cost
• Positive credit quality, just .01% non-performing loans
• Hidden value in branch ownership
• Near-term catalyst- R2000 index addition
• Could be worth twice current price
Scott Klein-Beach Point Capital Management
Opportunities in Stressed and Distressed Credit
Beach Point, which has $3.75 billion in assets, specializes in high yield bonds, distressed debt, and other credit related strategies. With the high yield market currently yielding 15-16%, Klein believes that the distressed market is currently offering opportunities of a lifetime.
Despite the acknowledgement that defaults will continue to rise, Klein sees this as a lagging indicator, and believes that continued forced selling of distressed bonds will create continued opportunity in an extremely inefficient market.
According to Klein, the high yield market has gained an average of 35% in the 2 years following monthly declines of 5% or more. Such declined have only occurred four times, with the latest, and most severe in late 2008.
With the average high yield bond trading at 70 cents on the dollar, with an 8% coupon, Klein sees ample opportunity in this area, even if the worst default scenarios we’ve ever experienced (Great Depression) are repeated.
J. Carlo Cannell –Cannell Capital
Hydrodamalis Gigas
Carlo Cannell always manages to surprise, and this Congress was no different. He brought with him a co-presenter Karthik Panchanathan, a graduate student in Biology from UCLA who very articulately presented interesting examples of animals that had become extinct, or were on their way there. Before the audience scratched their head in wonder, Cannell very interestingly tied these situations to companies and industries that had followed a similar path.
Who knew that Hydrodamalis Gigas (the presentation title) is actually the scientific name for the Steller Sea Cow, a huge manatee-like animal that went extinct in 1741? Cannell tied the plight of this animal to that of the restaurant business: both had trouble adapting to environmental changes, the Steller Sea Cow faded into oblivion, and so have many restaurant chains.
The main point of Cannell’s presentation was that the laws of nature also apply to Wall Street, and investors would be wise to look for the “cockroaches” of companies- those that can survive nearly any situation. Look for businesses less prone to predators or extinction, says Cannell
Currently, Cannell finds the following industries attractive: Oil and gas, agriculture, death care, precious metals, energy service.
Whitney Tilson and Glenn Tongue-T2 Partners
An Update on the Mortgage Crisis and a Discussion of Wells Fargo
The conference concluded with Whitney Tilson and Glenn Tongue.
Last year, conference co-founder Tilson and Tongue, his partner at T2, hit the nail squarely on the head with their bleak outlook for the housing and mortgage markets; it was one of those sobering presentations that you hoped would not come to fruition. But it did, and the T2 guys were astonishingly accurate both with their macro views, and list of shorts and longs.
This year they put it in print with their book More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, which was the basis for much of their presentation. If their scenario continues to unfold as suggested, there is much more pain to come in housing land.
The reams of statistics and data they presented seem difficult to dispute, and they put it all in such easy to understand terms that they are well on their way to becoming the de facto experts on the crisis.
All is not lost though, this will not morph into the Great Depression in their view, and they still see opportunities in the markets, both on the long and short side.
Tongue presented the bullish case for Wells Fargo (WFC), which they were short earlier this year. Now they are long WFC:
• Capable of earning $3.35-$4.26/share, $17.1-$20.1 billion net
• Worth $40-$50/share at a multiple of 10-12
• Business has enormous yield spreads
• Buffet bought for his personal account
• The Wachovia portfolio already significantly marked down
Incidentally, waiting for the 10:35 flight back to Philly post Value Investing Congress West has become one of my opportune times to catch up on some reading. Last year, it was David Einhorn’s Fooling Some of the People All of the Time, a VIC giveaway, that I could not put down. This year it was Tilson and Tongue’s just released book (the give- away at his year’s VIC). With all of the confusion about the genesis of the housing crisis, this book is a must-read.
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
The U.S. Banking Sector: Chaos & Opportunity
M3 was founded in 2007, and invests (long and short) in small and mid cap names in the US bank and thrift sector. There are 1300 publicly traded banks, and 93% have market caps less than $500 million. Stock presented his view of the current state of the banking sector:
• Significantly undercapitalized
• Credit quality still deteriorating
• More bank failures
• Unemployment rate will continue to rise
• Commercial real estate is in trouble
Stock believes that there will be in excess of 150 bank failures in 2009. Stull, he and Waller are still finding opportunity on the long side, and look for the following:
• Low Price/Tangible Book
• Excess capital
• Low loan/deposits
• Attractive markets
• Bearish management team
• Share repurchase plan
• Attractive deposit base
One long name Waller and Stock like: First of Long Island (FLIC: $21.00)
• 140% of tangible book
• 11 times LTM earnings
• Excess Capital; 8.5% tangible equity/assets
• 68.5% loan to deposit ratio
• $ 1billion high quality deposits with 1% cost
• Positive credit quality, just .01% non-performing loans
• Hidden value in branch ownership
• Near-term catalyst- R2000 index addition
• Could be worth twice current price
Scott Klein-Beach Point Capital Management
Opportunities in Stressed and Distressed Credit
Beach Point, which has $3.75 billion in assets, specializes in high yield bonds, distressed debt, and other credit related strategies. With the high yield market currently yielding 15-16%, Klein believes that the distressed market is currently offering opportunities of a lifetime.
Despite the acknowledgement that defaults will continue to rise, Klein sees this as a lagging indicator, and believes that continued forced selling of distressed bonds will create continued opportunity in an extremely inefficient market.
According to Klein, the high yield market has gained an average of 35% in the 2 years following monthly declines of 5% or more. Such declined have only occurred four times, with the latest, and most severe in late 2008.
With the average high yield bond trading at 70 cents on the dollar, with an 8% coupon, Klein sees ample opportunity in this area, even if the worst default scenarios we’ve ever experienced (Great Depression) are repeated.
J. Carlo Cannell –Cannell Capital
Hydrodamalis Gigas
Carlo Cannell always manages to surprise, and this Congress was no different. He brought with him a co-presenter Karthik Panchanathan, a graduate student in Biology from UCLA who very articulately presented interesting examples of animals that had become extinct, or were on their way there. Before the audience scratched their head in wonder, Cannell very interestingly tied these situations to companies and industries that had followed a similar path.
Who knew that Hydrodamalis Gigas (the presentation title) is actually the scientific name for the Steller Sea Cow, a huge manatee-like animal that went extinct in 1741? Cannell tied the plight of this animal to that of the restaurant business: both had trouble adapting to environmental changes, the Steller Sea Cow faded into oblivion, and so have many restaurant chains.
The main point of Cannell’s presentation was that the laws of nature also apply to Wall Street, and investors would be wise to look for the “cockroaches” of companies- those that can survive nearly any situation. Look for businesses less prone to predators or extinction, says Cannell
Currently, Cannell finds the following industries attractive: Oil and gas, agriculture, death care, precious metals, energy service.
Whitney Tilson and Glenn Tongue-T2 Partners
An Update on the Mortgage Crisis and a Discussion of Wells Fargo
The conference concluded with Whitney Tilson and Glenn Tongue.
Last year, conference co-founder Tilson and Tongue, his partner at T2, hit the nail squarely on the head with their bleak outlook for the housing and mortgage markets; it was one of those sobering presentations that you hoped would not come to fruition. But it did, and the T2 guys were astonishingly accurate both with their macro views, and list of shorts and longs.
This year they put it in print with their book More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, which was the basis for much of their presentation. If their scenario continues to unfold as suggested, there is much more pain to come in housing land.
The reams of statistics and data they presented seem difficult to dispute, and they put it all in such easy to understand terms that they are well on their way to becoming the de facto experts on the crisis.
All is not lost though, this will not morph into the Great Depression in their view, and they still see opportunities in the markets, both on the long and short side.
Tongue presented the bullish case for Wells Fargo (WFC), which they were short earlier this year. Now they are long WFC:
• Capable of earning $3.35-$4.26/share, $17.1-$20.1 billion net
• Worth $40-$50/share at a multiple of 10-12
• Business has enormous yield spreads
• Buffet bought for his personal account
• The Wachovia portfolio already significantly marked down
Incidentally, waiting for the 10:35 flight back to Philly post Value Investing Congress West has become one of my opportune times to catch up on some reading. Last year, it was David Einhorn’s Fooling Some of the People All of the Time, a VIC giveaway, that I could not put down. This year it was Tilson and Tongue’s just released book (the give- away at his year’s VIC). With all of the confusion about the genesis of the housing crisis, this book is a must-read.
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Wednesday, May 13, 2009
More Notes From Value Investing Congress West: Day 1
Zeke Ashton-Centaur Capital Partners
Surviving the Worst Case: Risk Management and Value Investing
A veteran of several Value Investing Congresses, Zeke Ashton provided useful insights into some of the pitfalls that befell value managers in 2008, and how to avoid them in the future.
Aston suggested that there are two approaches to value investing:
1. Home Run Portfolio- Highly concentrated portfolio, where identifying big winners is crucial to success
2. High Probability Portfolio- Less concentrated (15- 30 stocks), where avoiding big losers is critical to success. This approach relies on frequency of winners versus losers.
While Ashton did not suggest that either approach is inherently better, the approach used must be tailored to the risk management approach used by the manager.
Ashton prefers the high probability method, and warns against the following:
• Excessive Concentration
• Excessive exposure to one factor or theme
• Excessive leverage at the portfolio or security level (companies that are too highly leveraged)
• Political Risk- risk of changing laws, tax codes
• Liquidity Risk
• Risk from shorting- avoid blow-up risk
One of Ashton’s favorite ideas is Alleghany (Y), a holding company in property and casualty insurance:
• Long term record of value creation
• $4.1 billion investment portfolio
• Book Value is $277/share, currently trades at $261
• $351 million in share buybacks in 2008, all at below book value
• Fared well in 2008 despite gulf hurricanes, and portfolio damage due to market conditions- book value fell less than 5%
• Believes company is worth 1.5 times book, or $360 per share
Charles De Vaulx- International Value Advisors
A Cautious and Opportunistic Approach to Global Investing: Where Are We Finding Value Opportunities in the World Today?
First Eagle veteran De Vaulx, who left the firm in 2007, recently launched his new firm, International Value Advisors. In 2008, his fund was down just 12%, putting him near the top in terms of performance in a terrible year.
De Vaulx’s philosophy and approach to international investing:
• Cautious and opportunistic
• Firm is owner operated
• “Eat their own cooking” employees have $30 million invested in funds
• Long only across market cap spectrum
• Main objective- to not lose money
• Have high yield exposure
In terms of international investing, De Vaulx believes that:
• The diversification argument is weakening
• The real attraction is that international markets remain less efficient than US markets.
• In terms of accounting, disclosure is more reliable outside the US
• Corporate governance outside the US is weaker; a work in progress
De Vaulx’s current allocations reflect his view that there are greater opportunities outside the US in the equity markets, and opportunities in high yield bonds:
Equities: 33.1% (6.4% US, 15% Asia, 11% Europe)
High Yield Bonds: 34%
Gold: 8%
Cash: 23%
Energy and other: 1%
De Vaulx believes that while the overall outlook remains bleak, pockets of value have emerged. One of his favorite ideas is Nestle, which he sees as cheap and safe, with its food businesses trading at 9 times EBIT.
Brian Gaines-Springhouse Capital
Low Risk Bets in a Risky World
Brian Gaines is a first time presenter at this year’s Congress. Gaines’ fund, which was down 10% in 2008, employs both longs and shorts.
Long attributes:
• 20% maximum loss
• 50% upside in one year
• 5-10 great ideas, 70-90% long, 5-15% positions
• Willing to hold cash
Short attributes:
• 10% loss over time
• 30% upside in one year
• Small positions, 1-3%, bases on opportunities
Gaines is currently finding few ideas in the mid and large cap space, but is finding some small and micro cap names with strong balance sheets. One of his current ideas is Modus Link (MLNK), formerly CMGI.
• Supply chain management company
• $135 mm in cash, $30 mm in venture investments (at cost)
• Specialized packaging (Sandisk is one large customer)
• Largest player in outsourced space
• Has NOL carry forwards of $2 billion
• Currently trading at $4.00, has $4.70 in liquid net working capital
• Gaines believes base case value is $7.00 per share, could be as high as $20.
John Burbank-Passport Capital
China and the US Dollar: “Should We See Other People?”
Burbank stated that China is the world’s marginal provider of liquidity. In fact, China now holds 24% of US government debt. But given the amount of money the US has been printing, and the low interest rates on the debt, China may have better options for its capital beyond the status quo, including:
• Diversification-G8 becomes capital allocators, still dependent on exports
• Invest in itself-support internal growth, less dependence on exports
• Invest in what the country needs- natural resources including iron ore, potash, soybeans, copper and crude oil
Burbank sees little incentive for China to continue to but massive amounts of US Treasuries, and believes that they will indeed begin investing at home. This will allow for:
• Greater stability
• New sources of growth
• Less reliance on imports
Burbank also made the case for gold bullion, and believes that China, which currently holds about 31 million ounces, will be a big buyer of the precious metal.
In terms of other investment ideas, Burbank likes fertilizer companies Mosaic (MOS), and Potash (POT),
In conclusion, Burbank:
• Questions FIAT money
• Believes gold will continue to surge
• Believes there will be tailwinds for natural resources and emerging markets currencies
• Suggests China’s growth will become increasingly independent
Guy Spier-Aquamarine Capital Management
Investing in Global Education-From China to Brazil
Spier began with investment lessons learned in 2008 :
• Pay attention to concentration of risk- credit, geographic, customer
• Pay attention to hidden leverage
• Tangible versus intangible assets
• Importance of proper position sizing
• Always carry lots of cash
Spier ‘s believes that there are tremendous opportunities in for-profit education companies, especially in countries such as Brazil, where four such companies have gone public. Since Brazil does not have a system of community college, and there’s great demand for post-secondary education, he believes companies in this space will prosper.
His favorite name here is Estacio (Bovespa: ESTC3), which currently has 205K undergraduate students. Demand for graduates is high, as more than 19,000 companies are currently recruiting from the school. There may also ultimately be opportunities in India at some point as well. China also looks interesting, and here, he singled out Raffles Education Corp, which has done a tremendous job in training Chinese students to speak English.
David Rabinowitz-Kirkwood Capital
Stock-picking for the Scared and the Ignorants: Notes from an Expert
Atlanta based Rabinowitz focuses on restaurants and retailers primarily, and believes that having industry expertise is helpful in spotting and seizing opportunities. He does not currently own any names in either category, however, because he does not believe that valuations in these sectors are compelling.
Investment Process and Philosophy:
• Focuses on potential downside of an idea instead of upside
• Holds lots of cash
• Very patient, takes his time finding ideas and initiating positions
Rabinowitz favorite investment idea is Lancashire Holdings (LSE: LRE.L) a Bermuda based specialty insurer:
• 1.27 billion market cap
• Founded in 2005
• 86% of business is primary insurance; some reinsurance
• CEO Richard Brindle has a strong track record
• Conservatively run investment book: +3.1% return in 2008
• Short duration (1.8 years), $ 2billion portfolio, most in government bonds, $300 million in corporate, no equities
• Company trades at book
• Has returned 397 million in capital in 2007 and 2008
• Conservative in loss estimates
• 2009 pricing will be up 28-150% on its lines
• Worth 1.5 times book
Jed Nussdorf-Soapstone Capital
In Search of Pricing Power
Another first time VIC presenter, Nussdorf looks for businesses that have pricing power:
• Industries with inelastic demand
• Static or decreasing supply, enabling prices to hold or rise
• Believes that currently there is excess capacity in many industries, where there is little or no pricing power
Nussdorf believes that re-insurance is one of the few industries where demand is up, and there is pricing power. In fact, capacity has actually dropped as insurers suffered through a catastrophic 2008 (third worst year in history), and saw their investment income drop due to terrible market conditions.
Nussdorf likes the following names because of their clean investment portfolios, and low portfolio durations:
• Renaissance RE Holdings (NYSE:RNR)
• Validus Holdings (NYSE:VR)
• Lancashire Holdings (LSE:LRE.L)
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
Surviving the Worst Case: Risk Management and Value Investing
A veteran of several Value Investing Congresses, Zeke Ashton provided useful insights into some of the pitfalls that befell value managers in 2008, and how to avoid them in the future.
Aston suggested that there are two approaches to value investing:
1. Home Run Portfolio- Highly concentrated portfolio, where identifying big winners is crucial to success
2. High Probability Portfolio- Less concentrated (15- 30 stocks), where avoiding big losers is critical to success. This approach relies on frequency of winners versus losers.
While Ashton did not suggest that either approach is inherently better, the approach used must be tailored to the risk management approach used by the manager.
Ashton prefers the high probability method, and warns against the following:
• Excessive Concentration
• Excessive exposure to one factor or theme
• Excessive leverage at the portfolio or security level (companies that are too highly leveraged)
• Political Risk- risk of changing laws, tax codes
• Liquidity Risk
• Risk from shorting- avoid blow-up risk
One of Ashton’s favorite ideas is Alleghany (Y), a holding company in property and casualty insurance:
• Long term record of value creation
• $4.1 billion investment portfolio
• Book Value is $277/share, currently trades at $261
• $351 million in share buybacks in 2008, all at below book value
• Fared well in 2008 despite gulf hurricanes, and portfolio damage due to market conditions- book value fell less than 5%
• Believes company is worth 1.5 times book, or $360 per share
Charles De Vaulx- International Value Advisors
A Cautious and Opportunistic Approach to Global Investing: Where Are We Finding Value Opportunities in the World Today?
First Eagle veteran De Vaulx, who left the firm in 2007, recently launched his new firm, International Value Advisors. In 2008, his fund was down just 12%, putting him near the top in terms of performance in a terrible year.
De Vaulx’s philosophy and approach to international investing:
• Cautious and opportunistic
• Firm is owner operated
• “Eat their own cooking” employees have $30 million invested in funds
• Long only across market cap spectrum
• Main objective- to not lose money
• Have high yield exposure
In terms of international investing, De Vaulx believes that:
• The diversification argument is weakening
• The real attraction is that international markets remain less efficient than US markets.
• In terms of accounting, disclosure is more reliable outside the US
• Corporate governance outside the US is weaker; a work in progress
De Vaulx’s current allocations reflect his view that there are greater opportunities outside the US in the equity markets, and opportunities in high yield bonds:
Equities: 33.1% (6.4% US, 15% Asia, 11% Europe)
High Yield Bonds: 34%
Gold: 8%
Cash: 23%
Energy and other: 1%
De Vaulx believes that while the overall outlook remains bleak, pockets of value have emerged. One of his favorite ideas is Nestle, which he sees as cheap and safe, with its food businesses trading at 9 times EBIT.
Brian Gaines-Springhouse Capital
Low Risk Bets in a Risky World
Brian Gaines is a first time presenter at this year’s Congress. Gaines’ fund, which was down 10% in 2008, employs both longs and shorts.
Long attributes:
• 20% maximum loss
• 50% upside in one year
• 5-10 great ideas, 70-90% long, 5-15% positions
• Willing to hold cash
Short attributes:
• 10% loss over time
• 30% upside in one year
• Small positions, 1-3%, bases on opportunities
Gaines is currently finding few ideas in the mid and large cap space, but is finding some small and micro cap names with strong balance sheets. One of his current ideas is Modus Link (MLNK), formerly CMGI.
• Supply chain management company
• $135 mm in cash, $30 mm in venture investments (at cost)
• Specialized packaging (Sandisk is one large customer)
• Largest player in outsourced space
• Has NOL carry forwards of $2 billion
• Currently trading at $4.00, has $4.70 in liquid net working capital
• Gaines believes base case value is $7.00 per share, could be as high as $20.
John Burbank-Passport Capital
China and the US Dollar: “Should We See Other People?”
Burbank stated that China is the world’s marginal provider of liquidity. In fact, China now holds 24% of US government debt. But given the amount of money the US has been printing, and the low interest rates on the debt, China may have better options for its capital beyond the status quo, including:
• Diversification-G8 becomes capital allocators, still dependent on exports
• Invest in itself-support internal growth, less dependence on exports
• Invest in what the country needs- natural resources including iron ore, potash, soybeans, copper and crude oil
Burbank sees little incentive for China to continue to but massive amounts of US Treasuries, and believes that they will indeed begin investing at home. This will allow for:
• Greater stability
• New sources of growth
• Less reliance on imports
Burbank also made the case for gold bullion, and believes that China, which currently holds about 31 million ounces, will be a big buyer of the precious metal.
In terms of other investment ideas, Burbank likes fertilizer companies Mosaic (MOS), and Potash (POT),
In conclusion, Burbank:
• Questions FIAT money
• Believes gold will continue to surge
• Believes there will be tailwinds for natural resources and emerging markets currencies
• Suggests China’s growth will become increasingly independent
Guy Spier-Aquamarine Capital Management
Investing in Global Education-From China to Brazil
Spier began with investment lessons learned in 2008 :
• Pay attention to concentration of risk- credit, geographic, customer
• Pay attention to hidden leverage
• Tangible versus intangible assets
• Importance of proper position sizing
• Always carry lots of cash
Spier ‘s believes that there are tremendous opportunities in for-profit education companies, especially in countries such as Brazil, where four such companies have gone public. Since Brazil does not have a system of community college, and there’s great demand for post-secondary education, he believes companies in this space will prosper.
His favorite name here is Estacio (Bovespa: ESTC3), which currently has 205K undergraduate students. Demand for graduates is high, as more than 19,000 companies are currently recruiting from the school. There may also ultimately be opportunities in India at some point as well. China also looks interesting, and here, he singled out Raffles Education Corp, which has done a tremendous job in training Chinese students to speak English.
David Rabinowitz-Kirkwood Capital
Stock-picking for the Scared and the Ignorants: Notes from an Expert
Atlanta based Rabinowitz focuses on restaurants and retailers primarily, and believes that having industry expertise is helpful in spotting and seizing opportunities. He does not currently own any names in either category, however, because he does not believe that valuations in these sectors are compelling.
Investment Process and Philosophy:
• Focuses on potential downside of an idea instead of upside
• Holds lots of cash
• Very patient, takes his time finding ideas and initiating positions
Rabinowitz favorite investment idea is Lancashire Holdings (LSE: LRE.L) a Bermuda based specialty insurer:
• 1.27 billion market cap
• Founded in 2005
• 86% of business is primary insurance; some reinsurance
• CEO Richard Brindle has a strong track record
• Conservatively run investment book: +3.1% return in 2008
• Short duration (1.8 years), $ 2billion portfolio, most in government bonds, $300 million in corporate, no equities
• Company trades at book
• Has returned 397 million in capital in 2007 and 2008
• Conservative in loss estimates
• 2009 pricing will be up 28-150% on its lines
• Worth 1.5 times book
Jed Nussdorf-Soapstone Capital
In Search of Pricing Power
Another first time VIC presenter, Nussdorf looks for businesses that have pricing power:
• Industries with inelastic demand
• Static or decreasing supply, enabling prices to hold or rise
• Believes that currently there is excess capacity in many industries, where there is little or no pricing power
Nussdorf believes that re-insurance is one of the few industries where demand is up, and there is pricing power. In fact, capacity has actually dropped as insurers suffered through a catastrophic 2008 (third worst year in history), and saw their investment income drop due to terrible market conditions.
Nussdorf likes the following names because of their clean investment portfolios, and low portfolio durations:
• Renaissance RE Holdings (NYSE:RNR)
• Validus Holdings (NYSE:VR)
• Lancashire Holdings (LSE:LRE.L)
*The author does not have positions in any of the companies mentioned. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only.
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