Wednesday, May 13, 2009

Notes From The 4th Annual Value Investing Congress West

Over the next couple of days, I'll be posting notes from the Value Investing Congress, which I attended last week in Pasadena. Once again, this was a fantastic conference. I walked away from it with some very interesting investment ideas, as well as cautions about the days ahead. One of the greatest aspects of the VIC is the opportunity to meet other investors and portfolio managers, and to share ideas, perspectives and philosophies. Thanks to Congress founders John Schwartz and Whitney Tilson for once again putting on a first class event.

Fourth Annual Value Investing Congress West Day 1: Part I
David Nierenberg, D3 Family Funds
Not Dead Yet: Surviving Today to Triumph Tomorrow

David Nierenberg, who also appeared at the New York VIC back in October, led off the first day of the Congress. Interestingly enough, today we learned what D3 stands for: David’s Dirty Dogs. Nierenberg is a long-term investor, with an average holding period of 7 years, in the microcap space.

• Takes large stakes, average 10-15%
• Concentrated portfolio of 10 to 12 names
• Average market cap $300 million
• Seeks multiples, not percentages in terms of returns
• Works constructively with management and boards in order to improve companies
• Believes uncertainty does not equal risk of loss
• Looks out longer than the Street is willing to
• Believes leverage is lethal, and generally, will not use

Nierenberg’s presented his top holding, Move Inc (MOVE), in which D3 is the largest shareholder with an 18.4% position. Move Inc operates in the online media space, and owns, and Nierenberg believes that it will be a beneficiary of the decline in the newspaper industry, and a shift to more real estate internet advertising:

• Leading market share in their niche
• New CEO Steve Berkowitz, an industry veteran, who oversaw the buyout of Ask Jeeves, at more than 30 times the price from when he assumed leadership
• Relationship with NATIONAL Association of Realtors
• Recovering from years of bad management, fraud, and a history of losses
• Currently trading at TK, EV of $195 million
• Cash/Short term investments TK million, no LT debt
• Poised to be beneficiary of internet real estate advertising/bottoming housing market
• Company recently filed 13D asking management to reduce share count by 100 million shares
• Has a long-term price target range of $5.80-$14.50
Nierenberg also discussed Move at the last Congress. At the time shares were trading for $1.60, and are up 41% since.

Igor Lotsvin and David Chu- Soma Asset Management
Banks: Have We Seen the Worst Yet?

Newcomers to the Congress, Lotsvin and Chu launched their firm in December 2007, and had strong returns in their first full year (+26.1% net of fees). Their investment process is predicated on:
• Value bias
• Invest across the capital structure
• Long-term bias

Lotsvin painted an extremely sobering outlook for the banking system, credit and housing markets, suggesting that:
• Bank failures will accelerate, the worst of the banking crisis is yet to come
• Foreclosures will increase
• Commercial real estate is the next shoe to drop
• Construction loans will continue to go bad
• FDIC deposit insurance is running on empty ($16 billion left)

They presented the short case for Zion Bank, due to the following:
• Business in several bubble states (CA,NV,AZ)
• Credit deteriorating quickly
• Non-Performing assets grew 50% quarter/quarter
• Reserves are dropping
• Large degree of exposure to construction loans

*The author has a position in Move Inc. 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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