Value-oriented Equity Investment Ideas for Sophistica Sophisticated ted Investors A Monthly Publication of BeyondProxy LLC
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Investing In The Tradition of Graham, Buffett, Klarman Year V, Volume III March 2012
THE SUPERINVESTOR ISSUE
When asked how he became so successful, Buffett answered: “We read hundreds and hundreds of annual reports every year.”
Top Ideas In This Report Ambassadors Group (NYSE: (NYS E: EPAX) …………………… …………………… 68 Corning (NYSE: (NY SE: GL GLW) W) ………… ………………… ……….... .... 84
Screening for bargains owned by superinvestors
Latest top holdings of 50+ top investors
20 companie companies s profiled profiled by MOI MOI research research team
Proprietary Propr ietary selection selection of Top Three candid candidates ates for investment
Plus: Lisa Rapuano’s guest write-up on Ambassadors Group
Plus: Exclusive interview with John Lambert
Plus: Favorite stock screens for value investors
Xerox (NYSE: (NY SE: XRX XRX)) ………… ………………… ………… … 144
Also Inside Editor’s Commentary ……… …………… ……….. ….. 4 Rapuano on Ambassadors Group ….. 6 …….. 7 Interview with John Lambert ………
Portfolios with Signal Value™ ……12 ………. …... 68 20 Superinvestor Holdings ……
Screening Superinvestor Stocks….. 148 Favorite Value Screens ……………158 ……... 16 167 7 This Month’s Top Web Links …….
About The Manual of Ideas Our goal is to bring you investment ideas that are compelling on the basis of of value value versus versus price price.. In our quest for value, we analyze the top holdings of top fund managers. We also use a proprietary methodology to identify stocks that are not widely followed by institutional investors. Our research team has extensive experience in industry and security analysis, equity valuation, and investment inves tment management. management. We bring a “buy side” side” mindse mindsett to the idea generation process, cutting across industries and market capitalization ranges in our search for compelling equity investment opportunities.
Superinvestor Superinve stor companies companies ment mentioned ioned in this issu issue e incl include ude AbitibiBowat AbitibiBowater, er, Alliant Techsystems, Ambassadors Group, Ameriprise Financial, Financial, Annaly Capital, Apache, Apache, Assured Guaranty, Axis Capital, Baker Hughes, Bank of America, Best Buy, BofI Holding, Boston Scientific, BP, C&J Energy, Canadian Natural Resources, Capital One, Chevron, CIGNA, Citigroup, Cliffs Natural, CNinsure, Commercial Metals, ConocoPhillips, Corning, Covidien, Cowen, Cowen, CVR CVR Energy, Dell, Delphi Delphi Automotive, Automotive, Delta Air Lines, DeVry, DIRECTV, Enstar Group, Everest Re, Flagstone Re, Flextronics, Gannett, General Motors, Genworth Financial, GeoMet, Goodyear Tire, Google, Greenlight Re, Halliburton, Hanesbrands, Hartford Financial, HCA, Health Mgmt Associates, Hewlett-Packard, HollyFrontier, Ingram Micro, JPMorgan JPMorgan Chase, Katy Industries, KKR & Co., Kronos Worldwide, MEMC Electronic Materials, Meritor, Navistar, Newcastle Investment, Newfield Exploration, Exploration, Oracle, Owens Illinois, Illinois, Patterson-UTI Energy, PDL BioPharma, PennyMac Mortgage, PHH, Popular, Quad Graphics, R.R. Donnelley, RenaissanceRe, Republic Airways, Sanofi-Aventis, Seagate Technology, SK Telecom, SLM Corp., Spectrum Brands, Staples, Symetra Financial, Financial, Take-Two Interactive Interactive Software, Targacept, Telecom Argentina, Teva Pharma, Torchmark, TOTAL, TravelCenters, TRW Automotive, United Continental, Universal Stainless, US Airways, Valassis Comms, Valeant Pharmaceuticals, Valero Energy, Validus, Virgin Media, Warner Chilcott, WellPoint, Xerium Technologies, Xerox, YPF, and more.
(analyzed companies are underlined)
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Table of Contents EDITORIAL COMMENTARY ................ .................................. .................. .................. ................. ......................4 .....4 GUEST WRITE-UP: LISA RAPUANO ON AMBASSADORS GROUP..........6 EXCLUSIVE INTERVIEW WITH JOHN LAMBERT........................................7 ONLINE ONLY: THREE EXCLUSI EXCLUSIVE VE INTERVIEWS ......... ................. .................. ................. ....... 10 50+ PORTFOLIOS WITH SIGNAL VALUE™.................... VALUE™............................. ................... ................. ....... 12 AKRE C APITAL (CHUCK AKRE)........................................................ )........................................................................................ ........................................ ........ 13 ALTAI C APITAL (TOBY SYMONDS ) ................................. ................................................................. ..........................................................14 ..........................14 ANCIENT ART / TETON (QUINCY LEE) ................................ .............................................................. ...................................................... ........................ 15 APPALOOSA (D AVID TEPPER) ................................ ............................................................... .................................................................16 ..................................16 ATLANTIC INVESTMENT (ALEXANDER ROEPERS) ................................ ............................................................. ...................................... ......... 17 B ARES C APITAL (BRIAN B ARES).............................. )........................................................... ............................................................. ................................... ... 18 B AUPOST (SETH KLARMAN)........................................... )........................................................................... .........................................................19 .........................19 BERKSHIRE H ATHAWAY (W ARREN BUFFETT ) ............................... ............................................................... ............................................ ............ 20 BP C APITAL (BOONE PICKENS)......................... )...................................................... ................................................................ ......................................... ...... 21 BRAVE W ARRIOR (GLENN GREENBERG)....................................... )........................................................................ ........................................... .......... 22 BREEDEN C APITAL (RICHARD BREEDEN) ................................ ............................................................. ................................................. .................... 23 CENTAUR V ALUE (ZEKE ASHTON ) ................................ ................................................................ ...........................................................24 ...........................24 CENTERBRIDGE (JEFFREY ARONSON AND M ARK G ALLOGLY) ................................ .................................................... .................... 25 CHILDREN’S INVESTMENT (CHRIS HOHN)......................................... )......................................................................... ........................................ ........ 26 CHOU ASSOCIATES (FRANCIS CHOU) ................................ ................................................................ ...................................................... ...................... 27 E AGLE C APITAL (BOYKIN CURRY) ................................ ............................................................. ...........................................................28 ..............................28 E AGLE V ALUE (MERYL W ITMER)............................................................. ).............................................................................................29 ................................29 EDINBURGH P ARTNERS (S ANDY N AIRN) ................................ ............................................................... .................................................. ................... 30 ESL ES L INVESTMENTS (EDDIE L AMPERT) ............................... ............................................................ ...................................................... ......................... 31 F AIRFAX (PREM W ATSA) .............................. ........................................................... ................................................................ ............................................. .......... 32 F AIRHOLME (BRUCE BERKOWITZ) ................................ ............................................................. ...........................................................33 ..............................33 FORCE C APITAL (ROBERT J AFFE) ................................ ............................................................. ...........................................................34 ..............................34 G ATES C APITAL (JEFF G ATES) ............................... ............................................................... ................................................................35 ................................35 GLENVIEW (L ARRY ROBBINS) ................................ ............................................................... .................................................................36 ..................................36 GOLDENTREE (STEVE T ANANBAUM) ................................ ............................................................... ....................................................... ........................ 37 GREENHAVEN (ED W ACHENHEIM)......................................... )......................................................................... .................................................. .................. 38 GREENLIGHT (D AVID EINHORN) .............................. .............................................................. ................................................................39 ................................39 H P ARTNERS (REHAN J AFFER) ............................... ............................................................ ................................................................40 ...................................40 H ARBINGER (PHIL F ALCONE) ................................ ................................................................ ..................................................................41 ..................................41 H AWKSHAW (KIAN GHAZI) ................................ ............................................................... ................................................................. ....................................... ..... 42 HOUND P ARTNERS (JONATHAN AUERBACH) ................................. ................................................................. ........................................... ........... 43 ICAHN ENTITIES (C ARL ICAHN)..................................................... )........................................................................................ ........................................... ........ 44 INTERNATIONAL V ALUE ADVISERS (CHARLES DE V AULX) ................................... .......................................................... ....................... 45 JOHO C APITAL (ROBERT K ARR) .............................. .............................................................. ................................................................46 ................................46 L ANE FIVE (LISA R APUANO)............................... )............................................................ ................................................................ ........................................ ..... 47 LEUCADIA (I AN )....................................................................... ............ 48 AN CUMMING AND JOE STEINBERG)........................................................... LONE PINE (STEVE M ANDEL).................................................. ).................................................................................... ................................................ .............. 49 M ARKEL G AYNER (TOM G AYNER) ................................ ............................................................. ...........................................................50 ..............................50 MHR MH R (M ARK R ACHESKY) ................................ ................................................................ ................................................................... ....................................... .... 51 MSD MS D C APITAL (GLENN FUHRMAN AND JOHN PHELAN).................................................. ).............................................................. ............ 52 P ABRAI FUNDS (MOHNISH P ABRAI) .............................. .............................................................. ...........................................................53 ...........................53 P AULSON & CO. (JOHN P AULSON) ............................... ............................................................ ...........................................................54 ..............................54 PENNANT (ALAN FOURNIER).................................................. )..................................................................................... ................................................. .............. 55
Value-oriented Equity Investment Ideas for Sophisticated Investors
PERSHING SQUARE (BILL ACKMAN) ................................... ................................................................... ..................................................... ..................... 56 S AGEVIEW (ED GILHULY AND SCOTT STUART)............................................................. )......................................................................... ............ 57 SCOUT (J AMES CRICHTON) ............................... ............................................................... ................................................................... ..................................... .. 58 SECOND CURVE (TOM BROWN) .............................. ........................................................... ............................................................. ................................... ... 59 SOUTHEASTERN (M ASON H AWKINS) ................................ ............................................................... ....................................................... ........................ 60 THIRD POINT (D AN LOEB)............................. ).......................................................... ................................................................ ............................................. .......... 61 TIGER GLOBAL (CHASE COLEMAN) .............................. .............................................................. ...........................................................62 ...........................62 V ALUE ACT (JEFFREY UBBEN)...................................................... )......................................................................................... ........................................... ........ 63 WEITZ FUNDS (W ALLY W EITZ)............................................ )............................................................................ .................................................... .................... 64 WEST COAST (L ANCE HELFERT AND P AUL ORFALEA)......................................... )............................................................... ...................... 65 WINTERGREEN (D AVID W INTERS) ................................ ................................................................ ...........................................................66 ...........................66 WL ROSS & CO. (WILBUR ROSS) ................................. ................................................................. ..........................................................67 ..........................67
PROFILING PROFILI NG 20 SUPERINV SUPERINVESTOR ESTOR HOLDINGS .......... .................. ................. ................... .............. .... 68 (EPA PAX)– X)– L ANE FIVE × ................................ ............................................................... ...................................... ....... 68 AMBASSADORS GROUP (E (BHI HI)) – GREENHAVEN × .............................. ........................................................... ................................................. .................... 72 BAKER HUGHES (B (BSX SX)) – A PPALOOSA ×× .................................. .................................................................. ...................................... ...... 76 BOSTON SCIENTIFIC (B (CNQ NQ)) – BPC APITAL Ù, PERSHING SQUARE ×, WINTERGREEN Ù ..... ..........80 .....80 CANADIAN NATURAL (C ....................................... ........ 84 CORNING (GLW) – CENTURY ××, DODGE & COX ××, SEQUOIA ×× ............................... .............................................................88 .............................88 COVIDIEN (COV) – FPA CRESCENT ×, HEARTLAND × ................................ ................................................................ .................................... .... 92 CVR CV R ENERGY (CVI) – APPALOOSA Ø, ICAHN ×× ................................ (DEL ELL) L) – ANCIENT ART ××, F AIRFAX Ø, GREENLIGHT ××, IV IVA A Ø, WEITZ Ø ................... 96 DELL (D (DV)– V)– ARIEL ×, FP FPA A ××, L ANE FIVE Ù .............................. ........................................................... ..................................... ........ 100 DEVRY (D (FLI LIR)– R)– WEITZ × ............................... ............................................................... ......................................................... ......................... 104 FLIR FL IR S YSTEMS (F (GOO OOG)– G)– BRAVE W ARRIOR ×, LONE PINE ×, PENNANT ×, SCOUT ××, TIGER × .... 108 GOOGLE (G (WFR FR)) – ALTAI ×, THIRD POINT ××.............................. .................................... ...... 112 MEMC ME MC ELECTRONIC MATERIALS (W (NFX FX)) – E AGLE C APITAL ×, FP FPA A ×, O AKMARK × ............................ 116 NEWFIELD EXPLORATION (N (ORC RCL) L) – APPALOOSA ××, E AGLE ××, GLENVIEW ××, M ARKEL ×, WEITZ ×× ..... ....... .. 120 ORACLE (O (SPB PB)) – H ARBINGER × ................................ ................................................................ ......................................... ......... 124 SPECTRUM BRANDS (S (SPL PLS) S) – F ORCE ××, IV IVA A ×, OLSTEIN ××, PZENA × ................................ ............................................ ............ 128 STAPLES (S (TTW TWO)– O)– GLENVIEW ×, ICAHN Ù ................................ .................................................. .................. 132 TAKE-TWO INTERACTIVE (T (TRI RIP)– P)– PENNANT ××, SCOUT ××................................ .............................................................. ................................ .. 136 TRIPADVISOR (T (VME MED) D) – EDINBURGH ×× ................................ ................................................................ ............................................ ............ 140 VIRGIN MEDIA (V (XRX RX)) – CENTAUR Ø, GLENVIEW ×, GREENLIGHT ××, OLSTEIN × ............................. 144 XEROX (X
SCREENING SCREEN ING ~850 HOLDINGS OF 50+ SUPERIN SUPERINVESTORS.......... VESTORS.................. ........ 148 TOP 100, BY M ARKET V ALUE................................... ................................................................... .............................................................148 .............................148 TOP 100, BY THIS FYEP FYEPS S YIELD (CONSENSUS ESTIMATES) ................................ ................................................... ................... 150 TOP 100, BY NEXT FYEP FYEPS S YIELD (CONSENSUS ESTIMATES).................................................. 152 TOP 100, BY TRAILING GROSS PROFIT TO ENTERPRISE V ALUE ............................... ............................................... ................ 154 TOP 100, BY T ANGIBLE BOOK V ALUE TO M ARKET V ALUE................................ ........................................................ ........................ 156
FAVORITE SCREENS SCREENS FOR VALUE INVESTORS........ INVESTORS................. .................. .................. ........... 158 “M AGIC FORMULA,” B ASED ON TRAILING OPERATING INCOME ................................. ................................................. ................ 158 “M AGIC FORMULA,” B ASED ON THIS YEAR’S EP EPS S ESTIMATES ................................ ................................................. ................. 159 “M AGIC FORMULA,” B ASED ON NEXT YEAR’S EP EPS S ESTIMATES ................................ ................................................ ................ 160 CONTRARIAN: BIGGEST YT YTD D LOSERS (DELEVERAGED & PROFITABLE) ............................... ..................................... ...... 161 V ALUE WITH C ATALYST: CHEAP REPURCHASERS OF STOCK ................................ ................................................... ................... 162 PROFITABLE DIVIDEND P AYORS WITH DECENT B ALANCE SHEETS................................ ............................................ ............ 163 DEEP V ALUE: LOTS OF REVENUE, LOW ENTERPRISE V ALUE ................................ ................................................... ................... 164 DEEP V ALUE: NEGLECTED GROSS PROFITEERS ................................ ................................................................ .................................... .... 165 ACTIVIST T ARGETS: POTENTIAL S ALES, LIQUIDATIONS OR RECAPS ................................ ......................................... ......... 166
THIS MONTH’S TOP 10 WEB LINKS ......... .................. .................. .................. .................. .................. ........... 167
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Editorial Commentary With the February 15th institutional investor holdings SEC filing deadline behind us, we are ple please ased d to brin bring g you you a new new Super Superinv invest estor or Issu Issuee of The Manual of Ideas. We’ve screened hundreds of superinvestor companies, analyzed twenty of them, and found three ideas that deserve closer consideration: Ambassadors Group (Nasdaq: EPAX, $5.50 per share; MV $97 million) $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 Feb 03
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Ambassadors has a long-term record of impressive growth and returns on capital. Recent profitability has been pressured by revenue declines and high opex. The company has a strong balance sheet and should benefit from a recovery, assuming enrollment eventually returns to the 40,000-50,000 level that prevailed prior to the recession. Improving economic conditions in 2012 will not be fully reflected in travel bookings until 2013. It is worth noting that Ambassadors was slow to bounce back after the 2001 recession. Similar Simil ar dynamics may be at work currently due to the long lead time required to generate travel bookings. The current valuation appears to give little credit to recovery potential over the next two to three years. Lisa Rapuano of Lane Five, a large shareholder of Ambassadors, kindly agreed to write up her investment thesis for the benefit benefit of our members (see page page 6). Cornin Cor ning g (NY (NYSE: SE: GLW GLW,, $13.50 $13.50 per share share;; MV $20 bil billio lion) n) $35
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Corning, which makes specialty glass for LCD displays and other products, has been hurt by steeper-than-expected price declines in the display and solar panel markets. Display accounts for 40% of revenue, while the 50%-owned equity affiliate Dow Corning sells into the solar panel market. According to management, “price declines will reset the profitability of both Display Technologies and Dow Corning to lower levels.” Still, analysts expect Corning to earn $1.39 and $1.52 per share share in 2012 and 2013, respectively, rendering the shares quite attractive, especially in light of Corning’s very strong balance sheet. © 2008-2012 by BeyondProxy LLC. All rights reserved.
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Xerox (NYSE: XRX, $8.30 per share; MV $11 billion) $25
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Xerox is one of the cheapest large IT services companies, trading at under 8x estimated estima ted EPS of $1.12 in 2012. 2012. The company company has been alloca allocating ting capital capital in a shareholder-friendly way, spending an expected ~$1 billion on repurchases this year. Xerox also appears to have cost-cutting opportunities in the legacy ACS business, which was acquired for $6 billion in 2010. As a result, EPS growth is likely to outpace low to mid mid single digit revenue growth over the next few years. years. We wish Xerox had a stronger balance sheet but acknowledge that buying back shares is most likely a better use of capital than deleveraging the balance sheet. J
VALUEx Zurich/Klosters took place from February 1-3 and was once again a huge success. It was wonderful to see many of our members there and to meet some new value investors from around the world. I hope you’ll consider applying to attend next year’s event (check back at www.valuex.ch in a few months). I take this opportunity to thank my friend and co-organizer Guy Spier for making the event a great experience for all participants. VALUEx Zurich/Klosters simply couldn’t exist without Guy’s charisma and hospitality. J
We’ll be in Omaha for the Berkshire Hathaway annual meeting this May, and we invite you to join us for drinks and conversation. Space at our private gathering is very limited, so please email Oliver Mihaljevic today at
[email protected] if you plan on traveling to Omaha. We look forward to seeing you you there! While in town, we also look forward to attending John Schwartz and Whitney Tilson’s Tilson ’s starstar-studde studded d Value Investing Investing Congress, Congress, to be held on May 6-7. Visit www.ValueInvestingCongress.com/manualofideas before www.ValueInvestingCongress.com/manualofideas before March 15 to get $1,300 off (we earn no commission but are simply passing the best deal on to you). Sincerely,
John Mihaljevic, CFA and The Manual of Ideas research team
Access The Manual of Ideas Model Portf olio in the online
members area at members.manualof ideas.com. portf olio consists of three sub-portf olios: a downside protection portf olio, a deep value portf olio, and a magic f ormula portf olio. To view the portf olio s mark-to-market perf ormance and latest activit y, click on the above-ref erenced link or t ype it into your web browser.
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March 2012 – Page 5 of 169
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Guest Write-up: Lisa Rapuano on Ambassadors Group Ambassadors Group runs high-end student travel under the People to People and Discovery brand names. This business used to be terrific, showing high teens enrollment growth, high high 20%-range revenue growth and triple digit returns on invested capital from the early 2000s through its peak in 2007. However, the fundamentals have declined precipitously since then. This decline began in 2009, when the company saw a dramatic downturn in the number of students travelled during the financial crisis and recession. recession. Unlike most other travel and education related companies, however, there there has been no rebound in sales, and the number of enrolled travelers continues to contract. For 2011, the company should end the year with travelers tra velers down ~10%,and down over 54% from the 2007 peak. During this time, the company has increased its selling and marketing expenses related to the travel business by about 5% and general and administrative spending related to the travel business is down only 13% from from the peak. This is obviously very poor performance when what was a triple-digit return business is likely to earn only about 3% on equity and capital in the year we just completed. Despite the disappointing results for the last four enrollment years, we think the business could be revived to at least some level of its former level of performance, and at $5.50 today, it trades at a ridiculously compelling valuation. At today’s price of ~$5.62, the company has a market capitalization of ~$98 million. Cash at year end end was ~$58.6 million, plus student student deposits or $27.4 million, which we treat as debt, puts the enterprise value at ~$70 million. This company has historically generated outsized free cash flow due to high margins and low capital expenditure needs. Since the students put down significant significant deposits ahead of their their travel dates, the company holds a large amount amount of “float”. Working capital can be very volatile. volatile. In most years it is a benefit to cash but in 2011 we expect working capital to use cash because of lower student deposits and the company’s choice choice to prepay a lot of future future travel expenses. In 2010, however, working capital capital was positive. So let’s leave working capital aside for this exercise. The company’s pre-working capital free cash flow yield to EV is as follows: 2 0 1 1:
9 . 9%
201 20 10: 25.7 .7% % 200 009 9: 66.7 .7% % The company is trading at 5.1x the amount of cash it generated just a year ago. We rarely see these sorts of free cash flow multiples for any type of business. Clearly, the market is pricing the stock as if these cash flow numbers will never be repeated, but we think that with the right strategy free cash flow can return to previous levels. We are not advocating a particular approach at this time, but we see multiple ways that costs can be cut, money-losing programs can be closed, program itineraries and possibly pricing can be revamped to meet customer needs more appropriately, assets can be sold or optimized, and marketing and sales can be made more efficient. In December we asked the Board to consider consider these issues and come back to us with proposals, and we intend to continue this conversation. The core People to People Student Ambassadors program is less awful than the aggregate business appears to be, and we think there are opportunities to isolate that value while lowering or eliminating losses in the non-core non-core programs. In addition, we think there are costs that are redundant, marketing marketing approaches that are outdated and expensive, overcapacity of real estate that can be optimized and possibly sellable assets that are not core to the student travel operation. Overall we think EPAX is worth at least $10 if it is run in a low growth, asset optimized manner that returns capital to shareholders and possibly as much as $20 if the business can be reinvigorated and repositioned to begin growing again.
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Exclusive Interview with John Lambert We recen recently tly had had the pleas pleasure ure of int interv erview iewing ing Joh John n Lambert Lambert,, an inves investmen tmentt manager at London-based GAM. Before joining GAM in 2007, John spent six years as a pan-European investment analyst at Gartmore. Prior to that, he worked as a UK equity analyst at M&G and a commodity trader at Cargill. John holds a First First Class Class BA (Hons) (Hons) in Economics Economics with Russian Russian from from Exeter University and is a CFA Charterholder. He lives in London. The Manual of Ideas: How did you get interested in investing? Describe your path as an investor and what attracted you to your current role at GAM. John Lambert: I first got interested in investing on a personal level during the late 1990s when market gyrations were providing the retail investor with plenty of opportunities to make, and lose, money. I certainly didn’t take it very seriously to start with, but the more I learned about investing the more I felt it was the ideal job for me, so I decided to make a slight change of direction to my career, which was in commodities commodities at the time. It has taken a long time to really find a coherent investment style that I feel comfortable with, having worked for several years just as a European sector analyst in industrial goods and and services. This was followed for a while by running a small pot of hedge fund assets investing in that same sector, before moving to GAM. Here the brief is far broader, helping to manage long-only UK and global funds with a distinct contrarian and deep value approach.
Our time horizon is multi-year, which I feel much more comfortable with than the daily pressure of the hedge fund world. It represented a huge step up, given the relatively narrow area of expertise and experience experience as a sector analyst, so the learning curve was necessarily very steep. The principal attraction of this, at the time and still today, was the opportunity to expand my investment horizons substantially substantially and blend company-specific work with a much broader understanding of how markets and economies work and inte ract.
“In light of the underlying cash generation potential and asset value of [BP], we feel it is significantly undervalued at the current price.”
MOI: When it comes to stock selection, what are the key criteria you look for in potential investments? Lambert: In general, we look for investments in areas that for one reason or other are seeing particularly depressed sentiment or are simply out of favor. Within this framework, we also like stocks with a particularly strong internal dynamic, meaning they are to a greater-than-normal extent in control of their own destiny. This usually leads us to recovery or turnaround situations where the company is undertaking a number of different different actions to rehabilitate itself following a period of often dramatic underperformance. As a result they are often perceived as low-quality businesses. Moreover, we like to see a strong sense of change within the business, obvious examples of which would be the divisional structure of the company, the balance sheet and senior management. Unsurprisingly, these situations can offer considerable upside should the company execute the turnaround successfully. In the simplest terms you could say we look to exploit mean reversion.
a nd incentives of management? MOI: How do you assess the quality and Lambert: When considering management, we find humility and conservatism to be important qualities. A strong track record of achievement in directly comparable areas is obviously also nice to have. More often than not, we are © 2008-2012 by BeyondProxy LLC. All rights reserved.
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Value-oriented Equity Investment Ideas for Sophisticated Investors
seeing new management teams in companies where the previous incumbents have failed operationally or strategically, and hence assessing the abilities and direction of the new team becomes a critical task. There are no hard and fast rules, but we would be wary of those appearing overly confident or those for whom the share price appears to be more important than the business. i deas? MOI: How do you generate investment ideas? Lambert: The principal method of idea generation is through the use of very long-term performance charts, which help to identify areas of currently depressed sentiment and hence probable low valuations. Ideas also come through more quantitative screening, subscription to quality newsletters like the MOI and general reading. It is best described as eclectic, and there are no hard criteria for qualification as a potential idea or inclusion in the portfolio.
your favorite hunting grounds for investments in the current current MOI: What are your environment? Do you see value in Japan and, if so, how do you approach that market? Lambert: One of the attractions of our approach is that there will always be areas that are out of favor, that offer value, and there will always be companies that are experiencing a period of underperformance that has the potential to be reversed. Hence we find opportunities in a wide range of industries and geographies at any one time, since ideas are much more often than not generated at a stock-specific level.
“[Cable & Wireless Wireless’] ’] asse assets ts appear materially undervalued underv alued at the current current highly depressed share price, in particular their UK network, their subsea network internationally, their high-growth hosting business and substantial tax assets, to name just a few. We believe a much sharper focus on cash flow, and operational performance, will reveal the value of these assets in time.”
We do see value in Japan at the moment, and see high quality companies that are very cheaply priced in comparison with Western equivalents. Valuations have descended to levels comparable with or below Western markets, balance sheets are strong and corporates are being forced to undertake restructuring and business reorganizations more actively than ever before. Nevertheless, Western investors remain largely apathetic to this and hence the region appears to us to offer significant value. We don’t approach the market differently to any other, and if anything our investment style is even more weighted to a bottom-up approach. We still attempt to find companies that are either significantly below their intrinsic value, have strong turnaround potential or ideally bot h together. MOI: Would you outline the summary thesis behind one or two of your best ideas at this time? Lambert: Two such ideas at present would be BP (London/NYSE: BP) and Cable & Wireless Worldwide (London: CWC), both in the UK.
At BP, we feel the company has clearly had a cathartic shock following the Gulf of Mexico incident, which has led to new management and hopefully in time a new culture as well. This has had the benefit of allowing new management a much freer hand in terms of the strategic direction of the group. In light of the underlying cash generation potential and asset value of the company, we feel it is significantly undervalued at the current price. For Cable & Wireless Worldwide, this is a classic example of what we look for. Essentially the company has been mismanaged for a decade, and with old management finally cleared out, we feel a new start is in the cards. The company’s assets appear materially undervalued at the current highly depressed depressed
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Value-oriented Equity Investment Ideas for Sophisticated Investors
share price, in particular their UK network, their subsea network internationally, their high-growth hosting business and and substantial tax assets, to name just a few. We believe a much sharper focus on cash flow, and operational performance, will reveal the value of these assets in time. In the meantime, the depressed share price means the company could clearly be of interest to larger acquirers, with reported expressions of interest in both individual assets and the entire company in recent months. good ideas are only one one piece of the success equation. MOI: In investing, good Skilled portfolio management is indispensable. What are the biggest challenges you face as a portfolio manager? How Ho w do you manage risk? Lambert: One of the biggest challenges in our style is to manage the position size appropriately, since this is a key means both of controlling stock-specific risks and capturing performance from the best ideas within the portfolio. Recovery and restructuring situations can be long, drawn out processes that rarely develop in a straight line, so timing the entry and when to raise the holding to a meaningful exposure become critical success factors. In this regard we tend to start with small positions and grow them when we get greater confidence in the trajectory of the recovery. MOI: How has market volatility over the past few years affected your investment process, and have you tweaked your approach in any way as a result?
“Knowing where and how to make small improvements across the range of skills required to deliver better returns is difficult to do, and consequently it is often put to one side and forgotten. This would be a mistake.”
have generally not favored favored our style of investing Lambert: Market conditions have over recent years, so it has necessarily become somewhat more pragmatic. This essentially means we have blended our instinctive restructuring and recovery bias with higher quality and more naturally resilient businesses. In so doing, we have learned that value can be found found right across the quality spectrum, and not just in the most beaten-down and unloved names. MOI: What is the single biggest mistake investors make? Lambert: Compared to most professions, investors suffer a distinct lack of useful information and feedback that would enable them to improve their processes and, ultimately, results. Knowing where and how to make small improvements across the range of skills required to deliver better returns is difficult to do, and consequently it is often put to one side and forgotten. This would be a mistake. A greater effort to understand one’s strengths and weaknesses as an investor, by deconstructing and measuring your process as thoroughly as possible, is something the thoughtful individual should constantly be striving for. Process analytics and improvement should be a core part of any investment process! MOI: What books have stood out to you in recent years? Lambert: There is a clear winner in this category. Howard Marks’ The Most Important Thing was for me the most concise and insightful reference guide to value investing that I have yet found. Practically every page contains a nugget of thoughtful and indispensable advice. Moreover, what we found particularly resonant was the idea that a quality company is not synonymous synonymous with a good good investment, and that few assets are so bad they can’t be a good investment if
bought cheaply enough. MOI: John, thanks very much for sharing your ideas and i nsights.
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Value-oriented Equity Investment Ideas for Sophisticated Investors
Online Only: Three Exclusive Interviews If you have never
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The second annual VALUEx Zurich/Klosters gathering of value investors took place in early February in Switzerland (www.valuex.ch (www.valuex.ch). ). We had the the pleasure pleasure of learning from some of the most thoughtful investors in the business, including Guy Spier, Bryan Lawrence, Whitney Tilson, Colin Moran, Massimo Fuggetta, Simon Denison-Smith, and Ciccio Azzollini, to name a few. We are are pleased to share with you exclusive video interviews with the latter three fund managers.
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Watch our interview
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Watch our interview value
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Value-oriented Equity Investment Ideas for Sophisticated Investors
50+ Portfolios With Signal Value™
x x x
Revealing the Top Ideas of Top Investors
x
“Signal value” value” as opposed opposed to “noise.” We present the
holdings of some of the world’s top investors. We look for investors who have amassed impressive track records over
x x x x x
long periods of time. We choose these investors carefully
x
to avoid the noise inherent in most 13F-HR filings.
x
The following analysis is based on Schedules 13F-HR (institutional holdings report) filed with the SEC for the most
x x x x
recent quarter, as well as Schedules 13G or 13D and Forms 3
x
or 4 filed subsequent to the t he end of the quarter.
x
MOI Signal Rank answers the question, “What are this investor’s top ten ideas right now?” Rather than
simply presenting each investor’s largest holdings as o f the recently recen tly filed quarter quarter end, the MOI’ s proprietary methodology ranks the companies in each investor’s i nvestor’s portfolio based on the investor’s current level of conviction
x x x x x x x x x x
in each holding, as judged by the MOI.
x
Our proprietary methodology takes into account a number of variables, including the size of a position in an
investor’s portfolio, the size of a position relative to the market value of the corresponding company, the most recent quarterly change in the number of o f shares owned, and the change in the stock price of a position since the most recent quarterly filing date.
x x x x x x x x x x
For example, an investor might have the most conviction in a position that is only the tenth-largest position in such investor’s portfolio. This might be the
case if an investor invests in a small company, resulting in a holding that is simply too small to rank highly based on size alone. On the other hand, such a holding might represent 19.9% of the shares outstanding of the subj ect company, suggesting a high level of conviction. Our estimate of the conviction level would rise further if the subject company has a 20% poison-pill threshold, thereby suggesting that the investor has bought as much of the
x x x x x x x x x x x x x x
x x
Bill Ackman, Pershing Square Chuck Akre, Akre Capital Zeke Ashton, Centaur Capital Jonathan Auerbach, Hound Partners Brian Bares, Bares Capital Bruce Berkowitz, Fairholme Richard Breeden, Breeden Capital Tom Brown, Second Curve Warren Buffett, Berkshire Hathaway Francis Chou, Chou Associates Chase Coleman, Tiger Global James Crichton, Scout Ian Cumming and Joe Steinberg, Leucadia Boykin Curry, Eagle Charles de Vaulx, Int’l Value Advisors David Einhorn, Greenlight Phil Falcone, Harbinger Alan Fournier, Pennant Glenn Fuhrman and John Phelan, MSD Capital Jeffrey Gates, Gates Capital Tom Gayner, Markel Gayner Kian Ghazi, Hawkshaw Ed Gilhuly and Scott Stuart, Sageview Glenn Greenberg, Brave Warrior Mason Hawkins, Southeastern Lance Helfert and Paul Orfalea, West Coast Chris Hohn, Children’s Investment Fund Carl Icahn, Icahn Robert Jaffe, Force Capital Rehan Jaffer, H Partners Robert Karr, Joho Capital Seth Klarman, Baupost Eddie Lampert, ESL Investments Quincy Lee, Teton Capital Dan Loeb, Third Point Steve Mandel, Lone Pine Sandy Nairn, Edinburgh Partners Mohnish Pabrai, Pabrai Funds John Paulson, Paulson & Co. Boone Pickens, BP Capital Mark Rachesky, MHR Lisa Rapuano, Lane Five Larry Robbins, Glenview Alexander Roepers, Atlantic Investment Wilbur Ross, WL Ross Toby Symonds, Altai Capital David Tepper, Appaloosa Stevee Tanan Stev Tananbaum, baum, Golden GoldenTre Treee Jeffrey Ubben, ValueAct Ed Wachenheim, Deephaven Prem Watsa, Fairfax Wally Weitz, Weitz Funds David Winters, Wintergreen Meryl Witmer, Eagle Value
subject company as is practically feasible.
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Value-oriented Equity Investment Ideas for Sophisticated Investors
Akre Capital (Chuck Akre) Chuck Akre has been in the the investment business since 1968. While sometimes viewed as a small cap growth manager, Akre follows a value strategy that focuses on returns on equity, management quality and cash flow-oriented valuation analysis. MOI Signal Rank™ Rank™ – Top Current Current Ideas of Akre Capital Capital
Company / Ticker
1 2 3 4 5 6 7 8 9 10
Ross Stores / ROST Markel / MKL Dollar Tree / DLTR American Tower / AMT MasterCard / MA Berkshire Hathaway / BRK.A Enstar Group / ESGR Primo Water / PRMW CarMax / KMX O’Reilly Autom otive / ORLY
Price
Shares Owned
Holdings as % of
P/E (Est.)
Market Value ($mn)
Recent ($)
' from Dec. 30
Recent (‘000)
' from Sep. 30
Co.
Fu nd *
This FY
Next FY
Price/ Tang. Book
11,878 3,925 10,335 24,875 50,284 194,903 1,403 69 6,777 10,709
51.95 407.96 86.83 63.29 396.14 39 117,980 97.01 2.91 29.91 83.45
9% -2% 4% 5% 6% 3% -1% -4% -2% 4%
1,501 135 734 1,387 192 0 492 477 806 550
>100% >1 2% 2% 1% 2% >100% 5% >100% 0% 2%
