Tuesday, December 23, 2008
Monday, December 22, 2008
Sunday, December 21, 2008
Seth Klarman speaks on the value investor's perspective
One of the most admired value investors in the world who only rarely talks to the media about his methods. Read the brief interview here.
l
Thursday, December 11, 2008
Fortress Paper: a cheap, profitable microcap
As I grow older I've learned an important lesson: age (experience) and treachery will always trump youth and enthusiasm. Unfortunate but true-- and nowhere else do you see this as well demonstrated as in the investing world.
Along these lines, I'm never afraid to steal a great idea from people that may be smarter than me. Even more satisfying is the opportunity to buy a fractional ownership in a company at a considerably more favourable price than a good or even great investor has--- essentially utilizing all their expensive expertise and resources for FREE! Sounds pretty parsimonious, doesn't it? Isn't that what value investing is all about?
Of course the usual caveat applies: don't ever follow gurus (not even Warren Buffet) blindly. Their investment objectives and constraints are likely vastly different than yours. You need to understand the investment thesis in depth. If you don't want to do the research to do that, buy a few ETFs.... the couch potato's portfolio will do better than 90% of the "experts" at any rate and now is probably one of the best times to set one up.
Although I get a lot of my best ideas from the value gurus that I follow from gurufocus.com, I also search SEC sites for the smaller cap stocks that the giants pretty much need to ignore. These companies may have a lot of promise but they are simply too small to move the needle for these funds.
One company that has caught my eye for a couple of years and I'm intensifying my research efforts is Fortress Paper Ltd FTP.TO.
In my thieving and lazy fashion, I'm going to let the ABC funds guys (value investing oriented hedge fund, based in Canada) describe the compelling fundamentals, strong management and excellent prospects for this company that is trading at a fractional of its tangible book value-- providing a decent margin of safety. A sum-of-the-parts and DCF analysis conservatively indicates an intrinsic value of $10/share and FTP.TO is trading at half that today. I think that they are dead right about what the "Street" is missing: this is not a commodity play whatsoever. The market is treating the stock as if the company had a crappy balance sheet or negligible or absent earnings. This type of dislocation is where opportunity for small investors lies. I also think that investors see the wallpaper segment and run away screaming.... because it has something to do with housing and construction. We're still suffering from that hangover and probably will be for some time. Surprisingly, the wallpaper part of the company has been doing very well by selling to eastern European customers doing inexpensive renos.
The other issue is that not just anyone can open up shop and start printing security papers and currencies (lol) for obvious reasons. There are regulatory hurdles and expertise/reputation to attain first. I think this warrants FTP an economic moat albeit a narrow one. That is rare for such a small company.
The only thing I can add that isn't covered in the link above is that management owns 25% of outstanding shares and insider buying has occurred throughout 2008--- having the top people with "skin in the game" is almost mandatory for my investments, particularly these days. It firmly aligns their interests with ours, focuses their minds when market values dwindle and encourages long term thinking.
Downside risks:
- microcap and smallest in its industry
- competition coming on line for non-woven wallpaper niche
- material costs/capex high and difficult to anticipate
- really in the tech sector and in a rapidly changing industry-- we prefer slowly changing ones
- no dividend (a considerable downside when a near-term catalyst is not on the horizon)
I'm in no rush to invest in this company mostly because of downside #5. I plan to continue studying it for another quarter. A possible entry point would be <$5/share and target of >$10/share.
l
Monday, December 8, 2008
SYK v.s. IHI
I use the time spent actively ignoring the bear market rallies such as the one we're in now to study companies in depth for possible entry positions during the inevitable pullbacks.
Stryker SYK, a wide moat high quality medical device company, has caught my attention as it comes off of 52 week lows. Strong management, a bullet-proof balance sheet and great free cash flow growth certainly makes it attractive. Even in the current environment, SYK has increased its modest dividend by 20% (effortlessly sustained with a miserly 12% payout ratio). I'm still doing my due digilence on this one and fortunately, it's well within my circle of competence.
iShares Dow Jones Medical Device ETF IHI is also very interesting. It's a concentrated ETF with the top 10 out of 43 companies making up about 80% of the holdings. It's trading at about 40% discount to Morningstar's fair market value and I'm quite familiar with the most highly weighted companies 2/3rds of which are wide to narrow moat entities. Great FCF mean values, very tax efficient (no capital gains distributions since inception) and diversification of litigation risk (one of the major downsides of investing in this group) make this ETF quite compelling.
enjoy your research.... I do. :-)
Sunday, December 7, 2008
from Barron's: LUK (one of my favourite long term investments now)
Leucadia's Unmined Potential
By ANDREW BARY
Leucadia has savvy management and cheap assets -- an enviable combo.
LEUCADIA NATIONAL MAY BE THE CLOSEST THING to what Berkshire Hathaway was 20 years ago, before Berkshire became so large that Warren Buffett needed investments of several billion dollars to move the needle.
AFP/Getty Images
Above, a western Australia mine run by Fortescue Metals, a company in which Leucadia has a big stake.
Run for 30 years by a secretive duo, Ian Cumming and Joseph Steinberg, Leucadia has invested in a wide variety of stocks and a diverse group of businesses. It has generated impressive returns and developed a cult-like following among value-oriented investors who like its investment style -- and results. Buffett is a fan of Leucadia, although Berkshire doesn't own the stock. Leucadia's book value, which stood at $23 a share on Sept. 30, is up from just 11 cents in 1979, an annual growth rate of more than 20%.
Leucadia (ticker: LUK), however, has fallen 60% since Sept. 30, to about 17, leaving it way below its May peak of 57 and slashing its market value to $4.3 billion. Investors fear that Cumming, 68, and Steinberg, 64, have lost their touch, owing to declines in many of Leucadia's key equity holdings, including Australian iron-ore producer Fortescue Metals Group (FMG.Australia), securities firm Jefferies (JEF), Canada's Inmet Mining (IMN.Canada) and auto-finance outfit AmeriCredit (ACF).
MANY OF THE COMPANY'S OTHER investments are suffering, including Cresud (CRESY), an Argentine agricultural and real-estate company, and Leucadia's 10% stake in a hedge fund run by William Ackman of Pershing Square that owns a single stock, retailer Target (TGT). Leucadia probably has lost half of the $200 million it put in the fund last year.
Fans argue that Leucadia is oversold, noting that it rarely has traded below book in the past decade and in recent years typically has commanded 1.5 to two times book. The stock could hit $30 in the next year if the company's equity holdings turn around and if Steinberg and Cumming take advantage of the current financial distress to display their old stock-picking magic. Says one Leucadia holder: "I don't think that they suddenly took stupid pills." Given market declines since Sept. 30, Leucadia's book value has now probably fallen closer to $20 a share.
Table: Leucadia's Key Investments
Steinberg and Cumming, who couldn't be reached for comment, focus on minimizing Leucadia's tax bill. The company now has $1.6 billion of deferred tax assets, indicating that it expects to shield some $5 billion of future profits from federal income taxes. Strip out that tax asset to reflect no future gains, and estimated book falls to around $14 a share. "That's a worst-case assumption. You're not paying much above that for the stock," says a recent Leucadia investor.
Book value also may be understated because of conservative valuations for real estate and other assets the company owns, plus a potentially lucrative agreement with Fortescue that pays Leucadia 4% of net revenues from its Australian iron-ore mine for more than a decade. The deal could produce more than $100 million of annual profits for Leucadia, assuming ore prices don't collapse.
Leucadia's operating businesses, including plastics, wood products, pre-paid phone cards, as well as a Napa Valley winery and the Hard Rock Hotel & Casino in Biloxi, Miss., don't generate much profit. Investors tend to value the company on book value, rather than earnings, because most of its worth lies in investments.
LEUCADIA ALSO HAS INVESTED about $100 million for an 87% stake in a medical start-up called Sangart, which is developing a blood substitute now in clinical trials. There have been many failures in this field, but Leucadia hopes that Sangart's product, Hemospan, is a winner.
Many holders simply view Leucadia as a play on Cumming and Steinberg's investment acumen. Both intend to stay on the job for a while; their employment contracts run into 2015. Some Leucadia watchers believe the company will be liquidated or sold when Cumming and Steinberg leave the scene.
Like Buffett, Cumming and Steinberg believe in a strong balance sheet. As of Sept. 30, Leucadia's $8.4 billion in assets significantly exceeded its $2.6 billion in debt and other liabilities. Leucadia had about $500 million of cash and equivalents on Sept. 30, down from $1.4 billion on Dec. 31. Dividends certainly aren't a drain on its cash. This year, there will be none; last year, the payout was only 25 cents a share.
Unlike Berkshire, Leucadia lacks significant operating businesses; its focus tends to be on more speculative companies. It has paid $405 million for 32 million shares -- a 28% stake -- in AmeriCredit, which provides auto loans to those with weak credit. Reflecting a tough economy and tightness in the credit markets, AmeriCredit shares are 40% below Leucadia's cost.
Cumming, Leucadia's chairman, and Steinberg, its president, may be the lowest-profile leaders of any sizable public company. Outside of their annual shareholder letter and appearance at the annual meeting, they stay out of public view. There are no earnings conference calls, no investor presentations and no financial guidance. There are no photographs of Cumming or Steinberg in the annual report. Hardly any analysts cover the company because of its complexity and minimal communications.
LEUCADIA INVESTED IN FORTESCUE in 2006, when founder and CEO Andrew Forrest needed money to build a giant mine in a remote area that would compete with Australian iron-ore titans Rio Tinto and BHP Billiton to supply the voracious Chinese steel industry. Leucadia, which initially invested $400 million, now owns 9.9% of Fortescue. The miner's shares got as high as A$13.15 in May, at the height of the commodity boom, making Leucadia's stake worth $3 billion and pushing up Leucadia stock. Since then, Fortescue has slid to A$2.50 still more than double Leucadia's cost.
The Bottom Line
Leucadia is trading near 17, versus a book value now estimated at 20. If Leucadia's two top managers haven't lost their investment touch, the stock could hit 30 in a year.
Leucadia also has a close relationship with investment firm Jefferies, reflecting in part Steinberg's friendship with CEO Rich Handler. Last year, Leucadia took a 50% stake in Jefferies junk-bond trading unit, in return for $350 million, even though securities firms rarely sell outsiders parts of their trading operations. This year, Leucadia has accumulated a 30% stake -- 48.6 million shares -- in Jefferies itself, at an average cost of $16. But the stock has dropped to around 10, less than 80% of book value.
Jefferies isn't immune to Wall Street's troubles -- it laid off about 10% of its staff last week -- but its losses have been relatively modest because it doesn't take big trading positions. Still, its high-yield trading business has lost more than $80 million this year. Jefferies, a scrappy niche firm, focuses on equity trading and junk bonds, as well as investment banking.
Leucadia now looks like an attractive play on its depressed investments and on the ability of Cumming and Steinberg to find new opportunities. Unless the pair has indeed taken "stupid pills," investors could do well taking a ride with them
By ANDREW BARY
Leucadia has savvy management and cheap assets -- an enviable combo.
LEUCADIA NATIONAL MAY BE THE CLOSEST THING to what Berkshire Hathaway was 20 years ago, before Berkshire became so large that Warren Buffett needed investments of several billion dollars to move the needle.
AFP/Getty Images
Above, a western Australia mine run by Fortescue Metals, a company in which Leucadia has a big stake.
Run for 30 years by a secretive duo, Ian Cumming and Joseph Steinberg, Leucadia has invested in a wide variety of stocks and a diverse group of businesses. It has generated impressive returns and developed a cult-like following among value-oriented investors who like its investment style -- and results. Buffett is a fan of Leucadia, although Berkshire doesn't own the stock. Leucadia's book value, which stood at $23 a share on Sept. 30, is up from just 11 cents in 1979, an annual growth rate of more than 20%.
Leucadia (ticker: LUK), however, has fallen 60% since Sept. 30, to about 17, leaving it way below its May peak of 57 and slashing its market value to $4.3 billion. Investors fear that Cumming, 68, and Steinberg, 64, have lost their touch, owing to declines in many of Leucadia's key equity holdings, including Australian iron-ore producer Fortescue Metals Group (FMG.Australia), securities firm Jefferies (JEF), Canada's Inmet Mining (IMN.Canada) and auto-finance outfit AmeriCredit (ACF).
MANY OF THE COMPANY'S OTHER investments are suffering, including Cresud (CRESY), an Argentine agricultural and real-estate company, and Leucadia's 10% stake in a hedge fund run by William Ackman of Pershing Square that owns a single stock, retailer Target (TGT). Leucadia probably has lost half of the $200 million it put in the fund last year.
Fans argue that Leucadia is oversold, noting that it rarely has traded below book in the past decade and in recent years typically has commanded 1.5 to two times book. The stock could hit $30 in the next year if the company's equity holdings turn around and if Steinberg and Cumming take advantage of the current financial distress to display their old stock-picking magic. Says one Leucadia holder: "I don't think that they suddenly took stupid pills." Given market declines since Sept. 30, Leucadia's book value has now probably fallen closer to $20 a share.
Table: Leucadia's Key Investments
Steinberg and Cumming, who couldn't be reached for comment, focus on minimizing Leucadia's tax bill. The company now has $1.6 billion of deferred tax assets, indicating that it expects to shield some $5 billion of future profits from federal income taxes. Strip out that tax asset to reflect no future gains, and estimated book falls to around $14 a share. "That's a worst-case assumption. You're not paying much above that for the stock," says a recent Leucadia investor.
Book value also may be understated because of conservative valuations for real estate and other assets the company owns, plus a potentially lucrative agreement with Fortescue that pays Leucadia 4% of net revenues from its Australian iron-ore mine for more than a decade. The deal could produce more than $100 million of annual profits for Leucadia, assuming ore prices don't collapse.
Leucadia's operating businesses, including plastics, wood products, pre-paid phone cards, as well as a Napa Valley winery and the Hard Rock Hotel & Casino in Biloxi, Miss., don't generate much profit. Investors tend to value the company on book value, rather than earnings, because most of its worth lies in investments.
LEUCADIA ALSO HAS INVESTED about $100 million for an 87% stake in a medical start-up called Sangart, which is developing a blood substitute now in clinical trials. There have been many failures in this field, but Leucadia hopes that Sangart's product, Hemospan, is a winner.
Many holders simply view Leucadia as a play on Cumming and Steinberg's investment acumen. Both intend to stay on the job for a while; their employment contracts run into 2015. Some Leucadia watchers believe the company will be liquidated or sold when Cumming and Steinberg leave the scene.
Like Buffett, Cumming and Steinberg believe in a strong balance sheet. As of Sept. 30, Leucadia's $8.4 billion in assets significantly exceeded its $2.6 billion in debt and other liabilities. Leucadia had about $500 million of cash and equivalents on Sept. 30, down from $1.4 billion on Dec. 31. Dividends certainly aren't a drain on its cash. This year, there will be none; last year, the payout was only 25 cents a share.
Unlike Berkshire, Leucadia lacks significant operating businesses; its focus tends to be on more speculative companies. It has paid $405 million for 32 million shares -- a 28% stake -- in AmeriCredit, which provides auto loans to those with weak credit. Reflecting a tough economy and tightness in the credit markets, AmeriCredit shares are 40% below Leucadia's cost.
Cumming, Leucadia's chairman, and Steinberg, its president, may be the lowest-profile leaders of any sizable public company. Outside of their annual shareholder letter and appearance at the annual meeting, they stay out of public view. There are no earnings conference calls, no investor presentations and no financial guidance. There are no photographs of Cumming or Steinberg in the annual report. Hardly any analysts cover the company because of its complexity and minimal communications.
LEUCADIA INVESTED IN FORTESCUE in 2006, when founder and CEO Andrew Forrest needed money to build a giant mine in a remote area that would compete with Australian iron-ore titans Rio Tinto and BHP Billiton to supply the voracious Chinese steel industry. Leucadia, which initially invested $400 million, now owns 9.9% of Fortescue. The miner's shares got as high as A$13.15 in May, at the height of the commodity boom, making Leucadia's stake worth $3 billion and pushing up Leucadia stock. Since then, Fortescue has slid to A$2.50 still more than double Leucadia's cost.
The Bottom Line
Leucadia is trading near 17, versus a book value now estimated at 20. If Leucadia's two top managers haven't lost their investment touch, the stock could hit 30 in a year.
Leucadia also has a close relationship with investment firm Jefferies, reflecting in part Steinberg's friendship with CEO Rich Handler. Last year, Leucadia took a 50% stake in Jefferies junk-bond trading unit, in return for $350 million, even though securities firms rarely sell outsiders parts of their trading operations. This year, Leucadia has accumulated a 30% stake -- 48.6 million shares -- in Jefferies itself, at an average cost of $16. But the stock has dropped to around 10, less than 80% of book value.
Jefferies isn't immune to Wall Street's troubles -- it laid off about 10% of its staff last week -- but its losses have been relatively modest because it doesn't take big trading positions. Still, its high-yield trading business has lost more than $80 million this year. Jefferies, a scrappy niche firm, focuses on equity trading and junk bonds, as well as investment banking.
Leucadia now looks like an attractive play on its depressed investments and on the ability of Cumming and Steinberg to find new opportunities. Unless the pair has indeed taken "stupid pills," investors could do well taking a ride with them
Risky business
The Economist article on bond spreads and dividend yields.
l
ps I'm putting together a few presentation for investing ideas together that I'll post in the next few weeks.
l
ps I'm putting together a few presentation for investing ideas together that I'll post in the next few weeks.
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