Contrarians hate it when the market moves up!

...particularly when there isn't a valid reason for it to do so!!! Efficient market, my #@$@.

I realize that Wall and Bay Street try to be forward looking but this is nuts. All the fears that precipitated the panicked selling have not gone away. They were overblown to an extent but they are still there. Every level headed person realizes that the "great de-leveraging" still has to play out for some time longer-- probably until mid-2009 at the very least.

In the mean time, I'm accumulating as much cash on the sideline as I can for entry into up to 4 new position and adding to some old ones:

New ones:

LUK: mentioned in the previous post, LUK came within a few dollars of my bid of $19/share and then leaped up to $27. Very frustrating. There is a cult-like following of this holding company so a lot of regular people (and gurus like Bruce Berkowitz) understand the quality of its management and the balance sheet despite the detractor: short term uncertainty of the highly assets Leucadia is so adept at acquiring (i.e. 70% of the portfolio is in JEF, a boutique investment bank!). I'm hoping that these people will go away soon and there will be some sort of macro-economic scare to knock them out of the stock so I can buy it real cheap. I'd hold this 3-10 years+.

HHULF.PK: Hamburger Hafen und Logistik reviewed several times. Knocked down to the low 20's euros. Short term outlook for this high margin, highly profitable company isn't good but long term is excellent. I think that it is very well managed. I'd buy in the high teens-- only because Europe is so out of fashion right now (like PHG) and I think I can get that price. I think the FMV of HHLA should be 50-60 Euros/share based on comparable ports EV/EBIDTA valuations. Being traded OTC makes this a thinly traded stock-- another reason it shouldn't be traded but bought for the 5 year+ horizon.

Old ones:

PHG-- because of the dividend, great balance sheet and the "green" play with the LED lighting market share. It's also very, very cheap, even after the rally. I don't think it's a GREAT company like LUK or has potential to be great like Hamburger. I think it's dirt cheap for a profitable company with 3 B of cash in the bank, trading at 0.7 book value, P/E of 5, P/S 0.5 and 15% ROE. Hard to resist at < $16/share

BBSI-- one of my favourite small caps. In a deeply cyclical business and still making money. Has no debt, high insider ownership and very strong management. The CEO has been sick lately and required some sort of major surgery-- this has me mildly concerned. The company ran well and maintained their + cash flows despite a terrible environment for staffing/PEO services with him being absent so that's reassuring. Dividend is being maintained and the share buyback proceeding as planned. They still have 50 M in the bank for acquisition etc. I'd buy at $9 or less without hesitating.


Others:

SEB

AXP

HOG

SNY

NVS

Pzena's view of value opportunities

Read it here.

Don't fight the drug dealers--- buy them!

My favourites: SNY, NVS, BMY, SGP

Invest in the Investors: LUK Leucadia National Corporation

I'm attracted to holding companies that are:

1. trading below book value
2. have management with "skin in the game" (significant insider ownership) and a long term track record
3. little or manageable debt

I've admired Leucadia for a long time but much like BAM, held off actually owning shares because of inflated valuations. This clearly is no longer the case.



Run by gifted mavericks Ian Cumming and Joseph Steinberg, Leucadia National corp is an eclectic, diversifed holding company that was founded over 150 years ago. Its investment portfolio is quite focused and includes small cap biotechs, wineries, copper mines and boutique investment banks. They are deep value investors with a penchant for the "cigar butt" approach. To quote the duo in a shareholder's letter:

“We tend to be buyers of assets and companies that are troubled or out of favor and as a result are selling substantially below the values which we believe are there. From time to time, we sell parts of these operations when prices available in the market reach what we believe to be advantageous levels.”


Bull Case for LUK

• masterful capital allocation has produced a 21.4% CAGR increase in book value/share since 1979!
• average ROE is 21% over 29 years
• being mid cap (5 B) has allowed it to outperform Berkshire Hathaway's stock over the last 20 yrs
• high insider ownership. Steinberg and Cumming each own 13% of the outstanding shares.
• high degree of guru ownership, with many recently increasing their stakes including Bruce Berkowitz, Tom Gayner and David Winters.
• Mr. Steinberg and Mr. Cumming have signed a 10 year contract to stay with the company and in the last AGM they said they would work there as long as they physically could. Apparently they are both in excellent health.
• historically trades at 2 x book value, currently trading at 0.7
• plenty of liquidity current ratio> 3
• mostly long term debt with a low D:E ratio v.s. peers of 0.29 and leverage ratio of 1.38.
• currently P/E ratio 10 x P/B 0.7 = 7 (far below Ben Graham's 22 criteria)
• using an aggregate sum-of-the-parts, P/B value analysis and DCF analysis, they came up with a FMV of about $40/share roughly double what the shares are currently trading at.
  

Bear Case for LUK

• shareholders need to rely on the expertise of only 2 aging individuals as the company is a specialist in picking unprofitable and troubled investments and fixing them up as opposed to Buffett's strategy of picking wonderful businesses that essentially run themselves, with or without him
• heavy exposure to commodities and overseas ones to boot. These will suffer in the global slowdown and may well not survive
• a concentrated portfolio magnifies bad investment decisions as well as good ones
  
• recent heavy investment in JEF, a small investment bank they bailed out of trouble. It may have a rough run before the credit squeeze runs its course.
• LUK's assets under management has shrunk by almost half (9 B-->5.3B) since Jan 2008 due to dwindling valuations
• as the company grows, it will likely grow more slowly due to more competition for distressed potential investments and the law of large numbers
• dividend yield is very modest at 1%; however, the managers are considering increasing this
  

IMHO, this is an excellent long term opportunity to own a company with a superb track record at an affordable price. It would be appropriate for a 3+ year time horizon in an RRSP.

I've put in a low ball bid at $19/share and hope it gets filled on a really nasty day in the stockmarket!

when a dollar goes for $0.60

Stocks trading for less than the company's cash in the bank

More comments and stocks ideas to exploit the panicked selling

Unwinding hedge funds, mutual funds and some silly retail investors with margin accounts have been forced to sell their favourite holdings of late. Those of us who have some cash on the sidelines may well have the opportunity of a lifetime.

Read First Eagle's view on this matter.

I've been concentrating on accumulating shares in companies with an established history of creating shareholder value (i.e. ROE >20% over 5 years), strong balance sheets, dividend yield over 2.5% and compelling valuations. The Grahamian simple valuation measure of focusing on companies that have a price-to-book ratio multiplied by the price-to-earnings ratio of less than or equal to 22 is helpful. I also prefer companies that have hard assets so I can focus on tangible book value that exclude such nebulous items as goodwill.

If you can ignore the macro-economic view for a moment (and I agree that it is hard to), you can choose wide economic moat companies with household names trading at amazing discounts to FMV. Most of them are in the DOW: AXP, MMM, GE, JNJ just to mention a few. DIA (the DOW Diamond ETF) is yielding about 3% now which isn't too shabby.

If you haven't read it already

Warren Buffett's New York Times Opinion Piece