Workshop 04/02/2014
- Whitney Tilson’s talk: Ignore the “I miss it” trap. Buy it even though it doubles since it is still value stock.
E.g. Railroad, airline, car rental, Berkshire, Airline just got from horrible to mediocre, not great. But it is good for me to do hedge in my portfolio
HHC is Tilson’s largest stock position
Delta and MU are both business which was terrible, now becomes mediocre. So worth investing.
Stock price normally collapses due to earning, not due to the foundmentals
Tilson’s portfolio
Greenmountain lost patent protection one year ago, change the CEO from coca cola, so the stock price should be under pressure.
When you hold a short position, but when something significant change (like management), you need to think about change your position to long. E.g. Magicjack, GGP.
Nettalk is identical to magicjack in terms of technical, however, it is too late and too small.
Questions for tilson
1. Patent protection: it is a very general ip, they can charge loyerty on this in the future
2. Magicjack app
3. Do you think about become the board of director?
Congress
04/03
- 8:30- 9:05 Tim Eriksen, the road less traveled
Book: “the road not taken”
Buffet focused his first decade on investing in micro cap stocks
Idea: Awilco Drilling AWLCF and AWDR
Small cap with large div, ebida, very low ep compared with other competitors
- 9:05 – 9:40 Carlo Cannell, the iron ranch
Good Ideas: PCA, American concrete; “Exciting” ideas: microvision, violin memory, plug power
Boring but great ideas:
Iron ranch; MH industry – manufactured homes; BBW
Tonga partners, LP
Trace Manipulation of stock: follow form 4: to know when the manipulator quits
http://finance.wharton.upenn.edu/~allenf/download/Vita/stock.pdf
Human nature tries to speculation tab analysis, resist it.
- 9:40 – 10:15 Chris Mayer, investing by the CODE
Idea #1 mortgage services companies (e.g. Ocwen, etc) MSRs
CHMI, cherry hill mortgage inv corp
Partnership with Freedom
Idea #2 investing in NPLs in the EU
EU banks sit on $1 tril + in NPLs
Non-performing loan services
The big three: UK, Spain, Ireland
Kennedy Wilson Europe (KWE)
The Kennedy Wilson complex (KW)
- 10:35 – 11:10 Sahm Adrangi, kerrisdale capital’s top equity investment for 2014
Short idea: Bofl Holding Inc. (BOFI), trades at 4x TBV now, 23 PE
It is one of the most expensive publicly traded banks in the US
As its balance sheet grows, and its high- return asset rolls over, it’s profit will significant reduce.
It’s loan portfolio is going roll into lower yield.
It’s historical loan yields are focused on jumbo loan, currently, the competition on jumbo loan is very severe.
BOFI’s depositors are less “sticky”. As more Internet based competition heats up, it’s position is weakening. Organic account growth has stalled.
Large lenders: GE capital, Ally Financial, CIT
Us online banks: everbank, first Internet bank of Indiana
Online division of us banks:
Its NPLs leave investors with very asymmetric risk to the downside
200 basis point increases of interest will become 20% reduction on NPLs return
- 11:10 – 11:45, Tom Russo, global value equity investing
Musings on “perils of Wall Street”
Core investing principles:
Fifty cents dollar bills
Capacity to reinvest: goodwill is the gift that keeps on giving; international, the most promising venue
Capacity to suffer: management matters, family controlled companies
Semper Vic partners, L.P.
Major “global value” equity holdings
Bad ideas on Wall Street typically are not bad ideas at the start, but rather good ideas taken to extreme. – Warren Buffett
Wall street’s mistaken emphasis:
Research and development as a percent of sales
Working capital as a percent of sales
Cash flow conversion ratio
Percent of business from new products (within 3 years)
Percent of business from developing product and emergent markets
Avoid family-owned companies
Invest as though you are a pilot
- 11:45 -12:20 Whitney tilson, sodastream my next deckers
Sodastream
Beaten down stock with High short interest (over 40% of the float), great moat
Short thesis: it is a fad
After my survey of 393 responses, I concluded that it is not a fad
The company has 50 years of history. Integrated into Samsung refrig and kitchenaid
Risk: no much growth since the house hold penetration is already high, not much potential to grow. So maybe the price will not be doubled or more as I expected.
The PE ratio is inline with peers
Competitors: Keurig Cold (it does not exist), Bevyz
Two embedded franchises: Western Europe and the co2 refill business
- 1:40 – 2:15 Eric Anderson, focusing where others aren’t
Market cap less than $500 mil
Under followed companies with little to no sell-side coverage – no one is educating the market
Why are we so lucky to have this investment opportunities?
Ideas #1 forrester (FORR)
Leading technology research and advisory company
Product overview:
Business technology (52% of sales)
Marketing and strategies (47% of sales)
Fair price is 48.19/share
Downside is protected by buy back
Risks:
Sales transition takes longer than expected
Increased competition in marketing & strategy research
Idea #2 OFS Capital (OFS)
Large inside ownership
CEO owns >10%, external manager own 30%
Investment risks:
execution risk – target growing SBIC assets $20-30m per quarter
Idea #3 Hartmann (HART)
Leading egg packaging company
- 2:15 – 2:50 David neuhauser, Livermore partners
Deep value and special situation driven
Our process:
Deeply undervalued and special situation: matrices – DCF, price to book, price to earning, EV to
Bottom-up analysis
Year 2013 portfolio highlights
Volt information Science (VISI)
Trioil resource – activist position in Canadian junior energy company.
New ideas for year 2014
Zargon, grossly undervalued per NVP
- 2:50 – 3:25 Lisa Rapuano, finding your way along the many paths of value
Finding my way
“The most important quality of an investor is temperament” – warren Buffett
Use a probability framework to constantly evaluate business value
Use depth of research and long term view to invest
The ways:
Compounders:
Great company reduces price due to short term problem
Contrarian
Activist or management collaboration candidates
Compounders: what are them?
1 less frequently misprinted
2 sources of undervaluation
Contrarian investment: what are they?
Calibration – wide range outcomes – probabilistic dominates valuation
Temperament requirements:
Patience for the right entry price
Patience with the turnaround
Weirdness
Ability to handle criticism
Ability to stand alone
Resourcefulness
Humility
Contrarian patience and timing illustrated: coco, IL
Activist/engaged investments: what are they?
Contrarian investments with an investor-created catalyst
Opportunity to improve returns
Considerations for engaged investing
Cautions and temperament requirements
Ideas #1 Markel
A compounding machine
Best in class property and casualty (p&c) insurer outperforms peers and the stock market, with much lower volatility (beta =0.6)
Market value Markel on BV, so stock will grow roughly with BV
Idea #2 bed, bath and beyond (BBBY)
Not a declining retailer
Established merchant with a “see-it-before-you-buy-it” assortment
- 3:45 – 4:20 Richard Lashley, a shareholder activist’s perspective on bank stocks
Post financial crisis recovery
There will be m&a boom
Bank stocks are cyclical – downturn is sharp and short, upside is long
Industry fundamentals are almost back to per-crisis level
Despite the rebound since 2009, small and mid cap bank and thrift stock valuations are still historically attractive
Median price/TBV is still 25% lower than historical high
Cost save adjusted M&A are historical attractive which will drive the boom of M&A
PL capital prefers JPM Tarp warrant, JPM.ws
Also the capital one tarp warrant (Coe.ws)
And PNC financial tarp warrants (pnc.ws)
Small cap bank stock
Metro Bancorp, inc (METR)
It lags its peers in proficiency
Despite this, it has a valuable franchise, a lot of potential buyers line up. Likely buy price: $27-30.
Horizon Bancorp (hbnc) – potential deleted from Russel 2000, buy a lot when it is deleted!!!!
Interest Bancshares (IBCA) – potential deleted from Russel 2000, buy a lot when it is deleted!!!!
- 4:20 – 4:55 Richard Pearson, some interesting situation, the sleuth of Wall Street
Focus on small-cap
Dream team group
Media mentions and small cap stocks
The phenomenon
Organovo equity prospectus
Unipixel
Lesson from unipixel
Lot78, stock from $1 to $24 in 2 weeks, then back to $0.5 in six months
Reasons to short ONVO
Breakdown of ONVO assets
A stock in search of a company
ONVO 1.0- selling 3d bio printers
2.0 – selling liver tox assays
3.0 – testing service model
4.0 manufactured human organs
A strong share price, in one year, $3 to $12
Quarterly R&D in perspective: $1-2 mil
Business announcements
Investor conference announcements
Analyst initiation = 50k
JPM is placement agent for it
Independent articles
Motley fool
Seeking alpha, etc
What do these article say?
Rumors, lies
Articles driving the price
Insider selling begins: automatically sell the stocks
Risks: current cash + capacity
$50 mil in cash at present
ONVO 5.0 anything is possible
4:55 – 5:30 Daniel miller, investing with conviction
Overview of Gamco investors (GBL)
Investment process
Open communication with management
Why buy with 60th best idea?
Ideas in sept 2013
realD (RLD), up 63.6%
Guidance software, up 27.7%
Internap, up 7.5%
Two new ideas on April 2014
Idea #1 Bon-ton stores (BONT)
2015 revenue: $2900 mm
2015 ebida: $200mm
X6.5
———————————–
PMV per share $23
Idea #2 Rowan companies (RDC)
2011 transformation
PMV per share = $43.50
04/04 second day of the congress
- 8:10 – 8:50, Eric Sprott, investment opportunity of your lifetime
Manipulation
BaFin, the German equivalent of the SEC, said that precious metal price was manipulated than LIPOR.
gold manipulation
Book “the gold cartel” by Dimitri Speck
Gold fix study by stern business professor shows signs of decade of nabk manipulation (Bloomberg)
Western central banks have no gold left
China net import: 1700 tons
World mine supply: 2300 tons (ex. China & Russia)
- 8:50 – 9:25 issac Schwartz, hidden in plain sight
Kazakh bank system
Loan and credit historical trend
Timeline of Kzakh banks
On the ground floor of global growth
Idea # 1 Company: Tarkett (TKTT)
Deconick family owns 50% of the stock
Globally consolidated
Average PE is 23.1, Tarkett is now 15.8
Two thirds share in most popular category, vinyl
Anticipated margin improvement
North America: if these floors could talk
Mostly residential until 2012
Sports surfaces and other aspects
Guide to naysaying
Russia/CIS is a troubled region deserving a low multiple
USA commercial recovery distant
Sports is a bad business – just look at the last decade
Russian growth can continue
North America
Tarkett’s potential
Multiple paths to 50% ebida growth in five years
Family did not sell in ipo
- 9:25 – 10:00 David Hurwitz, opportunities for activism in Korea
Korea GDP ranks 15th in the world, Total market cap Korean companies, Numerous cheap stocks in Korea, PE is 9.6, p/BV is 1.1, Warren Buffett loves Korean stocks, If I started my partnership now, I will be 100% in Korean stocks, Korea is not Japan, Difficulties of investing in Korea, Few companies report in English, Trading I’d required, Recent accounting change from Korean GAAP, Shareholder activism not yet widely embraced, Rights of minority shareholders in Korea
Companies
Past cases study:
Kukbo design co., ltd; Khomeini corp.
Case study
Samho development (010960); Ktcs corp
- 10:25 -11:00 Michael Kao, the Tao of asymmetric investing
GM distressed bond
GM milque is a 3 bagger
Fnma and Freddie mas pref
Today’s idea
A small-cap E&P common equity
The company is Tag Oil
We think of TAO CN equity as having a profile similar to distressed bond + multiple event options
Profile of a convertible bond
“Distressed bond” component
“Event option” component
Valuation
Base 102% upside; mid 340% upside; high 3040% upside
Recent event, marked with stock price figure
Why is is trading in deep value territory?
Disappointed production numbers in the past few quarters
Apache pull out of JV
Intrinsic and market value divergence creates asymmetry
Risks:
Commodity price risk
Potential environmental opposition to unconventional drilling
11:00-11:35 chan lee and Albert young, in search of hidden champions in South Korea
Macro environments:
Korea has achieved remarkable economic achievements
Strong fiscal position
Korean education
Exceptional infrastructure
Leading Korean companies in the world
Hidden champions from Korea: line; sm entertainment; Orion; amore pacific; hjc
Strong economic outlook
Summary
Korea is no emerging market; is a long term global powerhouse.
Ideas #1
Nexen tire (002350)
Established in 1958, manufacturing automotive tires
It is one of the fastest growing tire company in the world
Tire CP672 ranks third among 20 tires in the US consumer report
Global presence
Production capacity: cagr 13%
State of the art facilities
Growth in global market
Global market share: 0.8%
Financials, income statement
Valuation: $15.35
Nexen highlights
Alternative
Preferred stock, 60% discount to common stock
Idea #2 nexen corp., the holding company of nexen tire (40% holding)
Ticker: 005720:KS
- 11:35-12:10 John Lewis, value: 180 degrees from north to south
Research process:
– Value creation
Low value, growth ability, capital allocation
– quality business model
Porter’s five forces
User experience
High quality attributions
– capital structure and ownership
Strong balance sheet
Ownership mentality
Idea #1 tucows inc. (TCX)
Excellent CEO
Strong capital allocator
No analyst coverage
Opensrs
Godaddy ipo in q314
What is the domain services business worth?
Ting
Us telecom industry ripe for disruption
Significant growth, subscribers are up 380% YOY
Ting’s return on capital
Valuation $9-12
Valuation of TCX: $22
Idea #2 Rosetta Stone
Perception:
– losing market share to free products
– dying cd business
– low margin business
Reality
When will the market recognize value?
Adobe at 8x sales
Rosetta: 0.5x sales
Hidden value: global E&E business
Subscription business is the hidden gem
What is the E&E business worth?
At 3x Enterprice & education 2014 sales alone, RST is worth over $21 per share
Pipeline in place to drive future growth
New institutional and consumer product
Buying strategic assets at good prices
Livermocha (12/11/2013)
Lexia learning (08/01/2013)
Capital allocation
R&D bet
Share repurchase 08-22-2013
Consumer business is transforming
Valuation of RST: $28.90, 150% upside
Idea 2 intersections inc
Big inflection point?
No analyst coverage
New business matrics
Massively misunderstood
Three key business
Valuation $12
Value of identity guard at 15x ebida is $6.5
Value of voyce $0.6 – 2.88
Management has demonstrated a strong ability to achieve guidance
Management expects significant growth
- 1:30-2:05 Zeke Ashton, apples to apples
Anatomy of a bubble
PE, profit margin, sales growth/share, yield
Surviving the bear
Jan 2000 – July 2002, sp500 down -38.6%, Nasdaq -67.2%
Deja vu all over again
Fb to pay $19 bil for whatisapp
Echoes of the past:
Yahoo acquire broadcast for 6.5 bil
What were you thinking?
Subsystem
Perils of paying 10x sales
Bill fleckenstein, thestreet.com
The road to nowhere
What exactly are the implications of paying 10x sales for a group of stocks?
The usual suspects
Opposite ends of the value scale
Tesla – bad apple
BMW – good apple
Tesla vs BMW
Sales outstanding
Price
Sale volume
Sale growth rate
Revenue
Net profit/loss
Gross margin
Operating cash flow
Tesla margin mystery
Operation cash flow excluding regulatory credits is $63 mil; BMW enters the EV market
BMW finances a hidden asset which is better than M&T bank
Capital intensive business
Tesla: likely to be FCF negative for many years as it invests for future growth
Will likely to spend $15b to reach capacity of 300000 cars per year
Buy BMW at 25% discount; BMW is faily controlled; Common stock €92, 2.8 div yield
Preferred €68, high dividend; Can tesla growth into its valuation?
- 2:05-2:40 Daniel ferris, the best royalty investment in the world today
Altius mineral
3000-5000 small mining exploration stocks
1 in 3000 prospects becomes a mine
What is the prospect generator?
Trades intellectual capital for physical capital
Capex lite business model
When it works
Voisey Bay Royalty
Upside potential: Kami project
A transformative deal
Excellent royalty portfolio
Financing
- 2:40-3:15 arnaud Adler, investing in change
Activism: the art of influence
Proxy fight
Negotiated settlement
Public letter
Private letters
Informal communication
Security selection
High free cash flow yield
Multiple ways to win
Operating margins are too low
Poor capital allocation
Idea#1 hill international, inc (HIL)
Global project management firm
Founder and CEO of the company, combined ownership 30%
Why do we like the business?
High barrier to entry
Expense low
Agency model (low risk) vs contractor model (high risk)
Low capex
Hgh ROIC
Valuation:
Why is the stock undervalued?
– Most analysts do not use an appropriate peer group (no good US peer)
Project management firms
Startec
WSP global
Arcadia NV
WS Atkins
tetra tech
– Libyan receivables
– leveraged
Catalyst – time
Potential return 80% in early 2015
Idea generation
Typical multiple based search
Special situations
13D from strategic buyer – o’charley’s (chux)
13D from private equity – Michael Baker (BKR)
Annual meeting delay – J. Alexander’s Corporation (JAX)
What is the upside?
Is it a good risk award situation? $8 today – one year been acquired $13, Two years $19
