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.

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