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.
Tuesday, 26 May 2009
Thursday, 14 May 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, 13 May 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.
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 Realtor.com, 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.
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 Realtor.com, 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.
Monday, 11 May 2009
Catalyst Investment Research highlights Chemed (CHE)
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 Chemed Corp.
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 CHE. 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 Chemed Corp.
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 CHE. 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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