Friday, April 11, 2014

What We're Reading ~ Hedge Fund Links 4/11/14

Age bigger factor than size in hedge fund performance [FINalternatives]

Coatue to return $2 billion to investors [CNBC]

On lunch with T. Boone Pickens [Morgan Housel]

Looking at some hedge fund pay [Business Insider]

Hedge fund research: transparently short [Barrons]

Tiger Global invests in Quora [ValueWalk]

Inside Kyle Bass' favorite mortgage servicing play [II Alpha]

Hedge funds' leveraged bets on market rally to magnify selloffs [Reuters]

SAC portfolio manager Plotkin to start his own fund [WSJ]

JANA Partners Reduces Outerwall Position

Per an amended 13D filed with the SEC, Barry Rosenstein's hedge fund firm JANA Partners has reduced its ownership stake in Outerwall (OUTR) down to 4.9% of the company.  Due to portfolio activity on April 8th, they now own 997,041 shares.

This marks a sizable decrease as they've sold over 2.7 million shares since the end of 2013, with 725,000 of those sales coming since the middle of March.

JANA's filing indicates that they reduced the size of the investment "through regular portfolio management activities.  (JANA) is highly supportive of the recent steps taken by the Issuer's board and management, in particular the Issuer's commitment to improving capital allocation discipline, increasing its return of capital to shareholders, and driving cost efficiencies."

You can view additional recent portfolio activity from JANA here.

Per Google Finance, Outerwall is "formerly Coinstar, Inc., is a provider of automated retail solutions, which offers convenient products and services. the Company's offerings in automated retail include its Redbox business, where consumers can rent or purchase movies and video games from self-service kiosks (Redbox segment), and its Coin business, where consumers can convert their coin to cash or stored value products at self-service coin counting kiosks (Coin segment). Its New Ventures business (New Ventures segment) is focused on identifying, evaluating, building, and developing self-service concepts in the marketplace."

Thursday, April 10, 2014

Sohn Investment Conference Speakers Announced: Less Than a Month Away

The 19th Annual Sohn Investment Conference is right around the corner on May 5th, 2014 in New York.  This is one of the premier investment conferences each year and it features an insanely good speakers list.  Produced by Bloomberg LINK, the event is a fundraiser to support pediatric cancer research.  You can register for the Sohn Conference here.

Sohn Speakers List

- Paul Tudor Jones (Tudor Investment Corp)
- Bill Ackman (Pershing Square Capital)
- David Einhorn (Greenlight Capital)
- Philippe Laffont (Coatue Management)
- Michael Novogratz (Fortress Investment Group)
- Larry Robbins (Glenview Capital)
- Jeff Gundlach (DoubleLine)
- Chris Shumway (Shumway Capital)
- Zach Schreiber (PointState Capital)
- Mariko Gordon (Daruma Capital)
- James Grant (Grant's Interest Rate Observer)
- Dan Ariely (Professor of Psychology & Behavior Economics at Duke University)

Event Details

Date: May 5th, 2014

Location: Avery Fisher Hall, Lincoln Center.  New York, NY

Time: 12:00 PM - 5:30 PM

Reception to follow afterwards

New "Next Wave Sohn" Event Added This Year

For the first time, a "Next Wave Sohn" mini-conference will take place at the same location just before the main event.  Starting at 9:30 AM, Next Wave Sohn features up and coming managers presenting their latest investment ideas.  If you register for the main Sohn Conference, you can RSVP to Next Wave Sohn for no additional cost.

Here's the speakers list for Next Wave Sohn:

- Ethan Devine (Indus Capital)
- Jason Karp (Tourbillon Capital)
- John Khoury (Long Pond Capital)
- Nitin Saigal (Kora)
- Will Snellings (Marianas Fund)

Sohn Conference Less Than A Month Away

The Sohn Conference is less than a month away, so be sure to register before it's too late.  This year you're essentially getting to attend two conferences for the price of one, with proceeds benefiting pediatric cancer research.

This truly is a fantastic speakers list, so hear the latest investment ideas from top hedge fund managers by registering for the Sohn Conference here.

Howard Marks' Latest Memo: Dare To Be Great II

Howard Marks, chairman of Oaktree Capital, is out with his latest memo.  Entitled, "Dare To Be Great II", the letter is an addendum of sorts to an original piece he penned in 2006 called Dare to Be Great.

In his latest missive, Marks focuses on how investment managers need to define success and outline what risks they're willing to take to achieve it.  Marks devotes several paragraphs to this, stating investors have to:

- Dare to be different
- It isn't easy being different
- Dare to be wrong
- Dare to look wrong
- Looking right can be harder than being right

Marks notes,

"In order to be a superior investor, you need the strength to diverge from the herd, stand by your convictions, and maintain positions until events prove them right.  Investors operating under harsh scrutiny and unstable working conditions can have a harder time doing this than others."

There are numerous aspects that affect how much and what types of risks an investment manager can and will take: emotional stability, career risk (employers and/or clients), etc.  Obviously institutional investors face much of the latter with investors/clients becoming more short-term focused everyday it seems.

The Oaktree chairman concludes that,

"Unconventional behavior is the only road to superior investment results, but it isn't for everyone.  In addition to superior skill, successful investing requires the ability to look wrong for a while and survive some mistakes."

Embedded below is Howard Marks' latest memo: Dare To Be Great II:

You can download a .pdf copy here.

For more on this manager, head to some of Oaktree's recent portfolio activity here.  And for more memos from Marks, head to his previous one on the role of luck in investing.

Baupost Group Dumps Enzon Pharmaceuticals Stake

Seth Klarman's hedge fund firm Baupost Group has filed an amended 13G with the SEC regarding Enzon Pharmaceuticals (ENZN).  Per the filing, Baupost no longer owns a stake in the company.

The filing was made due to activity on March 31st.  Shares are trading under $1 now.  Baupost was out trimming its ENZN stake in January as well.  The hedge fund originally initiated their ENZN position in 2009 at much higher prices.

Per Google Finance, Enzon Pharmaceuticals is "a biotechnology company. The Company’s drug development programs utilize two platforms: Customized PEGylation Linker Technology (Customized Linker Technology) and third-generation messenger ribonucleic acid (mRNA) antagonists utilizing the Locked Nucleic Acid (LNA) technology. The Company has four compounds in human clinical development, a PEGylated version of the active metabolite of the cancer drug, irinotecan, PEG-SN38, and mRNA antagonists Survivin and the Androgen Receptor (AR). In addition, it has mRNA antagonist targets in various stages of preclinical research. The Company receives royalty revenues from licensing arrangements with other companies related to sales of products developed using its Customized Linker Technology-PEGINTRON. It is also using LNA technology to develop mRNA antagonists against oncology targets."

Wednesday, April 9, 2014

What We're Reading ~ Analytical Links 4/9/14

On unsentimental investors [Ritholtz]

The best and worst thing about investing [Reformed Broker]

Wall Street's brightest minds reveal the most important charts in the world [BusinessInsider]

Dollar General (DG) annual valuation [ModernGraham]

In scrutiny of cable merger, internet choice will be crucial battlefield [NYTimes]

Report on the performance of controlled companies [IRRC Institute]

Bank of America (BAC) has more upside [Barrons]

What investors need to know about rising rates [BlackRock]

Eminence Capital Ramps Up InterXion Holdings

Ricky Sandler's hedge fund Eminence Capital has filed a 13G on shares of InterXion (INXN) with the SEC.  Per the filing, Eminence now owns 5.6% of the company with over 3.88 million shares.

This marks a boost of 677,739 shares since the end of 2013.  The filing was made due to activity on March 26th.

Per Google Finance, InterXion "is a provider of carrier-neutral colocation data center services in Europe. The Company support customers through 33 data centers in 11 countries enabling them to protect, connect, process and distribute their information. Within its data centers, it enables its customers to connect to a range of telecommunications carriers, Internet service providers and other customers. Its data centers act as content, cloud and connectivity hubs, which facilitate the processing, storage, sharing and distribution of data, content, applications and media between carriers and customers, creating an environment, which it refers to as a community of interest. Its core offering of carrier-neutral colocation services includes space, power, cooling and a secure environment in which to house its customers’ computing, network, storage and information technology (IT) infrastructure."

Tiger Global Boosts Stake

Chase Coleman and Feroz Dewan's hedge fund Tiger Global has filed a 13G on shares of (WUBA).  Per the filing, Tiger Global now owns 6.5% of the company with over 1.2 million ADR shares (equivalent to 2.5 million ordinary shares).

This means they've boosted their exposure from 300,000 ADR shares (WUBA) at the end of 2013 to over 1.2 million ADR shares now.  The filing was made due to activity on March 28th.

Just recently, we highlighted how John Burbank's Passport Capital was active in WUBA shares as well.

Per Google Finance, is "a holding company. The Company is an online marketplace serving local merchants and consumers in China through its Website and mobile applications. Its online marketplace enables local merchants and consumers to connect, share information and conduct business. The Company’s online marketplace contains a range of information in approximately 380 cities, across diverse content categories, including housing, jobs, used goods, automotive, pets, tickets, yellow pages and other local services. Its online marketing services include listing services, such as real-time bidding and priority listing, and marketing services through collaboration with third-party Internet companies in China. The listings on its online marketplace cover a range of content categories, such as housing, jobs, used goods, automotive, tickets, homecare and relocation, renovation, wedding, business services, travel, education, food, beauty, entertainment, franchise, and other local services."

You can view other recent portfolio activity from Tiger Global here.

Tuesday, April 8, 2014

Value Investing Congress Las Vegas Notes 2014

Below are notes from the 2014 Value Investing Congress that just took place in Las Vegas.  Click each link to go to that speaker's presentation.

Value Investing Congress Las Vegas Notes 2014

- Thomas Russo's Presentation

- Whitney Tilson's SodaStream Pitch

- Sahm Adrangi: Short Bank of Internet

- Carlo Cannell's 2 Investment Ideas

- Tim Eriksen: Long Awilco Drilling

- Chris Mayer's 2 Picks 

- Eric Andersen (Western Standard): Pitches on Forrester, OFS Capital & Hartmann 

- Eric Sprott (Sprott Asset Mgmt): 2 Ideas

- David Neuhauser (Livermore Partners): Energy pitches

- Lisa Rapuano (Lane Five Capital:  2 Investment Ideas

- Zeke Ashton (Centaur Capital): Long BMW Preferreds 

- Daniel Miller (Gabelli):  2 Long Ideas

- Isaac Schwartz (Robotti & Co): Long Tarkett and Halik Savings Bank

- David Hurwitz (SC Fundamental): Opportunities in Korea

- Michael Kao (Akanthos Capital): His TAG Oil Pitch

- Chan Lee & Albert Yong (Petra Capital): Long Nexen Tire

- Richard Lashley (PL Capital):  TARP Warrants and small cap bank plays

- Richard Pearson: Short Organovo

- John Lewis (Osmium Partners): 3 Long Ideas

- Daniel Ferris (Extreme Value): Long Altius Minerals

- Arnaud Ajdler (Engine Capital): Pitch on Hill International


John Lewis' 3 Long Ideas at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is John Lewis of Osmium Partners who pitched 3 ideas: Tucows (TCX), Rosetta Stone (RST), and Intersections Inc (INTX).

John Lewis' Value Investing Congress Presentation

•    Launched 2002 in Greenbay California. Up to ~$1B market cap.
•    17.4% annualized since inception.
•    Their process 1- mid single digit of cash flow multiple, 2- well defined market segments, and 3- internal opportunities to reinvest capital in the business or capital structure.
•    Looks at the quality of the business model – porter’s five forces, define high quality businesses as businesses with long term customers, look for 10% EBIT margins and good returns on capital.
•    Don’t take balance sheet risk – no net debt businesses.
•    Invest alongside owner-operators.

•    Tucows (TCX) is the first idea – owns a variety of subscription based businesses. Think he is the small cap version of Singleton – has repurchased over HALF of the company with 7 dutch tenders. Announced a 15% share repurchase in march. Think its worth 22 versus $12.
•    First business is domain wholesale business very sticky and ting – newer business.
•    Very little following.
•    Domain business - $105MM rev, 11% EBITDA margins and 14MM domains. Three legs to the domain business – yummy names is an exceptional business. Cost basis is less than a dollar and sell them for $1500 - $1800 if they sell it.
•    Two interesting catalysts – GoDaddy was taken private at 2x sales. IPO in third quarter 3-4 sales.
•    Demand Media Spinoff is a comp – thinks it will spin for 1.5x sales.
•    Domain business worth between $10.7 - $17.
•    Ting – mobile wireless carrier. Retention rate is equal to contractual operators like Sprint ,AT&T. 
•    Believes the industry is ripe for disruption. Ting leverages Sprint’s network (MVNO).
•    Ting subscribers are up 380% YoY. Gives someone a $5 Starbucks gift card if they compare their bill to Ting.
•    Churn is 7% - ARPU is $21. $900 in lifetime revenue per customer. Generating an estimated 9x return on customer acquisition costs.
•    Think Ting is worth $10.5 using a DCF
•    Believe the business is worth $22MM per share or 75% upside.

•    Rosetta Stone (RST) is the next idea
•    Tremendous amount of progress.
•    Perception that they have lost market share – spends $200MM a year in R&D and control distribution – invested $1B in building the brand
•    Perception: Dying CD Business – CD business is in decline – worth only $4 per share.
•    Low margin business perception – maintenance R&D is $10MM, growth RD is ~$30MM.
•    Thinks Adobe is a similar story – from shrink wrapped product business to subscription, LT relationship SaaS business.
•    Hidden asset: Global E&E business – a lot of growth. 100% subscription as a service business with 80% renewals and high margins. Peers trade 4-6x sales, and a lot of M&A. 3x sales for the E&E business – 100% upside. M&A comps around 3x sales.
•    Key part of the business is distribution.
•    Acquired a freemium business – RST bought it below the price it cost to set up at customers at .50 cents – with cross sales already materializing. 
•    Purchased Lexia Learning, Tell Me More and Vivity Labs at attractive multiples.
•    Value CD business at half of sales 
•    SOTP of $28 

•    Next idea is Intersections Inc.  (INTX)
•    Thrown off lots of FCF – bought back shares – a cannibal.
•    Management and board own half of the Company.
•    14% dividend yield
•    BofA is 50% of the total business or $266MM in sales.
•    BofA component priced at 1x cash flow or run-off or $2.5. Shorts think the BofA is the entire business – false. Broke out identity guard- better offering than LifeLock and its compliant/ethical versus LifeLock.
•    Customer acquisition costs  - pay back period is 6 months. $42MM run-rate. Osmium believes it should be worth 15x EBITDA given its high margin profile this would be $6.5 per share. This is  reasonable given zero customer concentration, mid-teen EBITDA marginsand double digit growth (20%+).
•    Pet monitoring device Voyce – complete optionality. 
•    Put in the Oscar “Swag” Bag – a large range of outcomes.
•    $11MM in invested capital.
•    Management has been accurate in forecasting.
•    Followed this Company for six years – in 08 the worst year they were only off by 1% in regards to their forecast.
•    SOTP - $12 per share or a double.

Be sure to check out the rest of the Value Investing Congress presentations.

Zeke Ashton's Presentation on BMW Preferreds: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Zeke Ashton of Centaur Capital Partners who pitched BMW Preferreds.

Zeke Ashton's Value Investing Congress Presentation

•    Founded Centaur Capital Partners in 2002. Long-Bias, goes both long and short.
•    Started out as a “hybrid”, value investing made sense in 1997 – value stocks would just stay cheap. If you  bought tech stocks, made 50% in a month. Since he was new, looking at what worked. Was a value investor at heart, but couldn’t help himself to invest in some of these tech stocks.
•    Ballard power –speculative investment went from 100 to 2.
•    Deswell – cigar butt investment at that time – went up 50% and sold it. Bought it for 2x PE. Stock price declined and was flat, but shareholders received their capital back through dividends.
•    What to take from this? Graham and Dodd works – but buying good companies is better.
•    Comparison – Yahoo! Acquisition of is eerily similar to Facebook’s acquisition of WhatsApp.  Doesn’t know how Whatsapp will play out, but we know what happened with Yahoo! (Plus it was a win for us Dallas Maverick Fans)

•    Opposite End of the value scale – Tesla Vs. BMW. End of the day, both are Car Companies. Market Cap for Tesla $30B market cap, 23,500 cars sold, expecting 35k next year – BMW 2MM cars a year, not counting motorcycles – cars sold growing. From a scale standpoint, completely different businesses.
•    Tesla wasn’t so much in the car business – made a lot of revenue from various “regulatory credits”, which are deducted from your COGS! Alone, these are 8% of revenues. As a percentage of gross margin 45%.
•    TSLA has a smart group of guys – interesting how they hid the credits.
•    BMW is entering the EV market – has been prepping for this for a long time.
•    One BMW model – I3 and the I8 - $135K BMW convertible. 
•    BMW partnered with a Chinese car company to create an EV brand – Zinoro. If TSLA gains billions off opening one Chinese dealership, then what happens ot the JV which is opening multiple dealerships.
•    Financial services business is phenomenal. BMW Finance is a hidden asset. Also has an insurance operation – extended warranties, etc. Amazing businesses. They obtain 45% of all BMW sales as customers – captive base.
•    What would it take to replicate BMW? Well over the past ten years, they have spent over $100B in CapEx and $41B in R&D. Another secret sauce – can access the credit markets at attractive terms.

•    Buy BMW through the preferred – 25% discount or 8x earnings and 3.9% dividend yield. One of the best brands in the world, along with an attractive FinCo
•    SOTP – 6x OCF for the OpCo and a multiple for the FinCo in line with the market. Fair value for common shares $100 euros, common is at $91 – hence preferreds are the most attractive.
•    Tesla is priced for perfection, I wouldn’t recommend a short but it is an interesting company.
•    Q&A asked about the comparison between Chobani and General Mills (Tom Russo’s presentation).  BMW takes their time to be perfect.

Be sure to check out the rest of the Value Investing Congress presentations.

Daniel Ferris' Altius Minerals Pitch at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Daniel Ferris of Extreme Value who pitched Altius Minerals as a long.

Daniel Ferris' Value Investing Congress Presentation

•    Pitching ALS.TO Altius Minerals.
•    $5.3 per share in cash no debt.
•    Owns and creates royalties on mining assets.
•    10 – 12x chances to make 50x to 100x returns.
•    Just multiplied its royalty income 10x in a single transaction.
•    Narrow the field by buying prospect generator – i.e. trades intellectual capital for physical capital.
•    Two complementary businesses – mineral exploration, project generation and royalty creation. Also purchases royalties.
•    Have repeated this process multiple times – grown NAV.
•    Exit through the sale of a mine and retain a CapEx lite 2% royalty stream.
•    Capital structure - 27.9MM shares – zero debt.
•    Upside through the Kami Project – discovered a 1B tone iron ore deposit in Western Labrador. Four producing mines, skilled labor, mining friendly jurisdiction and the infrastructure in place.
•    Created Alderon Iron Ore – Altius owns 25% which in turn owns 75% of the Kami LP mine – iron ore mine. Hebei Iron & Steel owns the other 20%.
•    Feels good about the downside – hard to value these projects which are not producing- but high upside potential.
•    Could be valued off dividend if initiated.
•    NAV $15 per share currently.
•    Announced two major transaction buy 52% in 11 royalties from Sherritt. Coal and potash royalties.
•    Will pay $42MM for Carbon Development Partnership from Sherritt as well.
•    Excellent royalty portfolio – no exposure to thermal coal market prices.
•    Purchase price of $283MM –  financed with124MM cash, 40MM in an equity securities portfolio, 80MM TL and a 50MM convert – fluid situation. PF NAV, could be worth $20 versus current price of $14 – if they pay a dividend, expected price of $30 or more

Be sure to check out the rest of the Value Investing Congress presentations.

Petra Capital's Presentation on Nexen Tire: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Chan H. Lee and Albert Yong of Petra Capital Management whose presentation was entitled "In Search of Hidden Champions in South Korea."  They pitched Nexen Tire as a long.

Petra Capital's Value Investing Congress Presentation

•    South Korean based value manager based in Seoul – disciples of Ben Graham. Outperformed the Korean index – since inception annualized returns of 24% outpacing the KOSPI.
•    Misconception – Korea is not an emerging market
•    Size of Kentucky – GDP over $1 Trillion dollars in addition to being on of the wealthiest countries in the world.
•    Korea’s credit rating is higher than Japan, China, Israel and Italy.
•    Korean culture is heavily focused on education.
•    One of the best infrastructures in regards to internet – 83% high speed penetration and 80% using LTE smart phones.
•    GS thinks in FY15 – one of the wealthiest by GDP per capita.

•    Nexen Tire – Trades at 9.9x p/e. It is a hidden champion. Nexen tire currently Korea’s third largest manufacturer. One of the fastest growing tire manufacturers.
•    Growing at 20% a year – overall industry grew at 8% a year. Last year replacement tires declined by sales to auto makers increased materially.
•    Third tier tire manufacturer by tire price and brand recognition. 1st tier are players like Michelin/Goodyear.
•    Sales are diversified across the globe. Built a new factory in Czech Republic to penetrate Europe further.
•    Very efficient factories – cost structure is materially lower. Factories are highly automated.
•    Trades around 9x should be worth between 12x – 13x.
•    How to buy this cheap? Preferred stock. Pay a slightly higher dividend but no voting rights. 60% discount to the common stock! Trades at 4x PE .
•    Need to be careful – choose the right security. The price of common stock shouldn’t be overvalued. GAP will narrow eventually. 
•    Another method to buy this business cheap: Holding Company – Nexen Corp the holdco. $300 market cap, 70% BV, 6x P/E. 70% of the value is derived from Nexen Tire. 40% stake in Nexen Tire is GREATER than its market cap.

Be sure to check out the rest of the Value Investing Congress presentations.

Michael Kao's Presentation at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Michael Kao of Akanthos Capital who pitched TAG Oil (TAO.CN).

Michael Kao's Value Investing Congress Presentation

•    Returned 34.5% net to LPs with under 40% net common stocks and virtually no exposure to traditional credit.
•    Key tenants – capital structure L/S fund with an event driven bias. Look at the capital structure as a spectrum of opportunities. Agnostics between all securities in the structure – looks for the best bang for the buck – asymmetry – more upside than downside. Will create them by combining different pieces.
•    Concentrate in your best ideas.
•    Construct a portfolio of thematically diverse but asymmetric payoffs.
•    Thematic drivers – presenting a common equity idea
•    In FY10 presented GM distressed bonds as post-reorg equity would be valuable – one of their best investments – an 8 bagger since 09.
•    Look for off the beaten track securities
•    In bankruptcy – many interesting securities are created – a different resolution stub with no relation to the common equity was created – a 3 bagger.
•    Pitched Freddie/Fannie preferreds – likened them to railroad bonds – a 20 bagger for them and their largest event-driven position – very strong legal 

•    Common equity is today’s idea: TAG Oil (TAO.CN). E&P equity domiciled in Vancouver – operational assets on 2.8MM acres on conventional and unconventional assets are based in New Zealand.
•    Most prolific driller in New Zealand. Goal is to be the biggest E&P producer.
•    Company has a $140MM EV – 60MM in cash. $40MM in EBITDA.
•    TAO equity looks like a distressed convertible bond. If assets appreciate bond is only worth par. If asset value detriotiates, bond falls in value. If assets go way up, converts participate in equity. 
•    Believe it is trading below its bond floor and multiple option components.
•    Currently operates 26 wells in the Teranyaki basin in NZ. 1400 barrels a day or $40MM EBITDA. •    Event component – low risk drilling opportunities. East coast opportunity – 13B barrels of shale oil available alone, similar to the Bakken. Pie in the sky option – basin with no drilling, but seismic studies show favorable prospects. Valuation scenario assumes no value.
•    Valuation – base case of $6.0 – could double or more if other wells come online.
•    Company has made good acquisitions. Bought a permit for $2MM – huge find. Stock spiked and the Company raised capital at the peak. High flow rates showed high depletion rate in FY13, in January 2013 – APA (drilling partner) drilled out. 
•    Believe Apache pulled out for internal issues. During the period when APA pulled out, Nat Gas was in a trough level – hence Apache needed to focus on unconventional plays and were fed up with NZ environmental delays. APA committed $100MM but paid $26MM to TAO – TAO lost a partner but received $15MM from APA no strings attached for APA pulling out.
•    The Company has raised capital at astute times – never raised debt.
•    Why is it training in deep value territory.
•    Revenue and Book value have grown 4x and 13x respectively. Very asymmetric.
•    Chief risks – commodity risk, the company is 85% oil. Environmental opposition. TAO has had a better chance without APA in obtaining permits.
•    Limited operating history to the wells.
•    Lack of oil and gas infrastructure. If they have a big find, might need a JV partner.
•    CapEx – will spend $100MM plus through FY15 – but it is success based i.e. they can shut it off. •    Any day now the Company will announce results for a basin. If it disappoints – worst case $2 - $2.5. If the play works out, $4 - $5 per share.
•    Question – why are they not using debt? Being conservative – always self-funded themselves.
•    Owns Fannie/Freddie Preferred – question is the common better? If the $210B is paid to treasury is assumed gone to a sink hole- the run down value of entities will fall in waterfall method – common stock will be wiped out – preferreds fully covered. Common does have upside. Preferreds could be a triple.
•    Fairholme has been granted early discovery – will show how certain agencies planned their actions in regards to Fannie/Freddie was blatantly illegal.

Be sure to check out the rest of the Value Investing Congress presentations.

David Hurwitz on Opportunities in Korea: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is David Hurwitz of SC Fundamental who pitched opportunities in Korea.

David Hurwitz's Value Investing Congress Presentation

•    Value investors investing for over 20 years. 20% of their book is in Korea.
•    Unbelievable value in Korea.
•    Activism has worked out well so far. Launched a fund on activist opportunities in Korea.
•    Market capitalization of Korea is bigger than Hong Kong and Italy – similar to Germany.
•    GDP ranks 15th in the world.
•    Trades at 1.1x book versus S&P 500 at 2.6x
•    Graham and Dodd investments are available in KOSPI.
•    Warren Buffet has invested in Korea.
•    Korea is NOT Japan.
•    Minority shareholder rights are very well protected – better than the USA.
•    They have a ROE versus Japan
•    Difficulties of investing – lower volumes, need a trading ID, which isn’t hard to obtain. Accounting is a tad bit difficult due to the transition from Korean GAAP to IFRS. No other activists. Icahn was active in a Korean company years back.
•    Partners with the country’s pension funds. Voted against management – publicly stated they are going to vote for activists (they are the biggest asset manager).
•    1.5% ownership, you can call an annual meeting – phenomenal. At the AGM, you can put out proposals such as board member, buybacks, etc. You have to have held the shares for 6 months.
•    Statutory audit – a position that is effectively appointed by outside shareholders to oversee that the board does its duty properly – access to all books and records.
•    Contacted one of their contacts statutory auditors (activist campaign), the auditor didn’t even know what it meant/obligations.

•    Past case studies – Kubibo Design (spelling?) – trading for net cash, EV of 0. Without subtracting cash traded for 4x earnings. Growing business. Founder owned 50% of the Company. Gave them the cold shoulder. Put the proposal on the ballet requesting the statutory auditor. Real proxy fight and won. End of the day, CEO apologized, looked at capital allocation and the price increased.

•    Kabalem Co – cash was 70% of the market cap, 40% P/PV and 3.9x sustainable earnings. Told them would you buy your competitor for 4x earnings? They said of course. SC then proceeded to tell them that they could buy back their stock for 4x earnings and the light bulb went off – good outcome.

•    Current names – not risen in values from originally purchase price

•    Samho Development idea 1. Civil engineering business – government work.
•    Trades for .5x BV, 12.6% ROE, net cash is 105% of market cap.
•    15 years of consistent earnings. Earnings can cut in half and still a bargain.
•    Owns 6% of the Company.
•    Invested in venture capital and asset management business – so poor capital allocation.
•    Progress made? Passed resolution to repurchase shares. CFO gets it now
•    Convinced them to get rid of biotech investments.

•    Ktcs Corp – call center own the countries 411 directory and a reseller.
•    EV/EBIT of 1x.
•    P/E is 7x P/BV under 1, ROE ex cash 48%. Stable business.
•    Small shareholder has put through a few shareholder proposals.
•    Statutory auditor was fishy – getting paid more than the CEO.
•    Controlled by Korean Telecom – 16% owner.
•    Promised accountability – CEO bought a material amount of shares personally.

•    Strategy – buy things cheap that they make a good return as a passive investor- go active as needed.
•    Have Korean partners and Korean analysts.

Be sure to check out the rest of the Value Investing Congress presentations.

Isaac Schwartz's Pitch on Tarkett & Halik Savings Bank: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Isaac Schwartz of Robotti & Company who pitched Halik Savings Bank and Tarkett.

Isaac Schwartz's Value Investing Congress Presentation

•    Hidden in Plain Sight
•    Update on Kazakh Bank pitched prior – after a good performance it has declined by a third due to nervousness around the Russia/Ukraine situation.
•    Company is timely today versus last year – local investors in Kazakhstan – four primarily done by local investors buying back assets at low price to book values.

•    Idea – Halik Savings Bank – 20% ROE and trades at book value. Book value for share has doubled over the past years. •    Country supplies 3.5% of the world’s oil, and could double that. The other countries that can double output are not-stable. 

•    Tarkett is another idea. Trades in Paris and went public last fall. Leading company in global flooring. Generates 18% ROCE.
•    Poorly done IPO went public at 29 euros, trades at 26. 1.2B USD market cap.
•    Family and other shareholders like KKR and management own over 74% - 26% is free float. Family brought in KKR.
•    Thinks PE can be positive – look at the nature of private equity involvement (i.e. milk for earnings, multiple arbitrage or as a plus utilize industry contacts and plan for the long term). Family REMAINED in control so it did not utilize private equity leverage.
•    Rollup know how provided by KKR.
•    Business diversified around the world – including the former USSR countries. A lot of focus on these companies.
•    They are not in tile – they are the most global and diversified of the global flooring companies. Industry is globally consolidated.
•    Tarkett has a strong market share in Russia. Two thirds share in vinyl – the most popular category. •    A lot of renovation possibility from old soviet era buildings.
•    Barriers to entry in Russia? World’s largest vinyl factory (8x their competitor)
•    Decade to build and distribute brand.
•    Flooring is not a discretionary purchase. 
•    Trades at a big discount to peers – usually doesn’t like relative valuation. In Tarkett’s case margins are lower than competitors and a clear method to increase methods, especially North America. It has rolled up a dozen targets in 5 years.
•    North America has been a drag – but made an interesting acquisitions through Tandus. Purchased from Colin & Aikmans by Oaktree Capital.
•    After a few years, Tarkett purchased this asset from Oaktree.
•    Now they have a large scale and cross selling ability in the USA now.
•    A lot of optionality.
•    In global sports flooring – 50% market share – competes against Berkshire Hathaway (Shaw) is economically sensitive. 
•    Why is it cheap: Russia political issues, USA commercial recovery distant and sports is a bad business going off the past decade.
•    Multiple paths to 50% EBITDA growth – strong upside – good business.

Be sure to check out the rest of the Value Investing Congress presentations.

Eric Sprott's Presentation at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Eric Sprott of Sprott Asset Management who presented "Investment Opportunity of Your Lifetime."

Eric Sprott's Presentation at Value Investing Congress Las Vegas

•    Eric talked about manipulation and various issues – such as high frequency trading and front running. 
•    Gold manipulation – BaFIN the SEC equivalent in Germany said it was going to investigate the London bullion market Association in Nov/Dec 2013. In Jan 2014, they found that manipulation in Gold is WORSE than LIBOR. 
•    Deutsche Bank left the association that day.
•    Gold Fix study by Stein Business School shows signs of decade of bank manipulation.
•    2013 saw 6-8 sigma events a likelihood of one in a quadrillion.
•    Canada shouldn’t sell their gold at these prices.
•    Sprott’s analysis is that western central banks have no gold left. A raid is effected over 1,300 tones leave ETFs.
•    China’s demand is such that it consumes almost all the world’s mine supply.
•    India cooperates with other Central Planners to eliminate gold imports.
•    Gold isn’t a current account item – it’s a capital account item.
•    Who is buying? Iraq, China, Russia, Switzerland is now providing data on monthly shipping and where it is shipped too.

•    Pitched Barrick Gold and Crocodile Gold. At 1,300 gold price, both would earn .71/-.11, at 2,000 per ounce 2.52/.19 and at 2,400 per oz, 3.56/.36. 
•    Current price is 18.60 for Barrick Gold/.19 for Crocodile – price targets range from 94% upside to 1000% upside.
•    Every gold company has a contingent asset not on their balance sheet (assuming he is talking about a potential settlement).

Be sure to check out the rest of the Value Investing Congress presentations.

Daniel Miller's Pitch on Bon-Ton Stores & Rowan: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Daniel Miller of Gabelli's Focus Five Fund.  His presentation entitled "Investing in Conviction" pitched Bon-Ton Stores (BONT) and Rowan (RDC).

Daniel Miller's Value Investing Congress Presentation

•    Concentrated high conviction approach – owns 25 – 35 of the firms best ideas, with the ability to invest 50% of assets in the top 5 positions, however there is a 15% industry cap.
•    Private equity approach attempt to purchase the business at a 30% - 50% belpw PMV. Question to ask, would we want to own this business and could we generate a 25% IRR if they consummated a LBO?
•    Question to ask, why would you want to buy your 60th best idea?
•    Two ideas: both have transitions in regards to mgmt. teams and are niche operators in an environment with larger players. Both have the potential to rapidly grow FCF over the next quarters.

•    Bon-Ton Stores (BONT) is the first idea. $1.1MM EV/ $225MM market cap. Half of the debt is tied to mortgages, and the remainder from a 06 acquisition – primarily low cost.
•    270 locations – primarily in the mid-west. Operates in primarily small and mid-cap communities. •    Hired a new CEO two years ago – has done a good job restructuring and transforming the business. 
•    Currently trades for 5.0x FY2015E EBITDA of $200MM. Think its private market value is 6.5x EBITDA or $23 per share, roughly a double.
•    Why is it cheap? Poor weather as some stores were impacted for 10 – 20 days, and large shareholders like Fidelity sold some shares.
•    CEO does not want to commute from NYC to Milwaukee anymore, will be leaving next year. CFO is talented however.

•    Rowan (RDC) is the next pitch $4B market cap, $5.1B EV.
•    Is an operator of a young fleet of specialized jackups.
•    Went through a recent transformation.
•    Generates strong cash flow, believes they will generate $4 in earnings by FY15, and $5 or greater in FY16.
•    Why is it cheap? Trades against larger peers with older fleets like Noble, Seadrill, Ensco, etc. – whom which the sell-side is bearish.
•    Should generate ~$1.2B in EBITDA by FY15, apply a 6x multiple and the stock price is implied a $43.5 or 30% upside with no heavy lifting required. Also recently started a dividend.

Be sure to check out the rest of the Value Investing Congress presentations.

Richard Pearson Short Organovo: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Richard Pearson, dubbed "The Sleuth of Wall Street" at the conference.  He pitched Organovo (ONVO) as a short.

Richard Pearson's Presentation at the Value Investing Congress

•    Private investor based out of LA and Beijing. Looks at exposing at stocks that have been promoted and trade at excessive valuations.
•    Publish his filings on Seeking Alpha among other websites.
•    He was going to break a big short here. He was contacted by a person from the dream team (IR firm scandal – article recently on Barrons).
•    Asked him if he was interested in writing articles for the Dream Team’s promotions and he would receive $300 per write up.
•    Multiple legal issues – can be viewed as the statements promotions. Very risky proposition for the Company to be in. Richard “agreed” to go along with the scheme and uncover the identities of the authors, companies and firms involved. Of course, CC’ing his lawyer throughout. 
•    He started drafting fake articles with small mistakes – with a goal to see if the Company would make changes- was true as the articles were being EDITED by the Company. Had Microsoft word lock changes reviewed by the Company!
•    Richard notified the SEC in advance and published. Sad story, some of the Company’s were already under investigation while doing this! Galena Pharmaceutical is the prime example
•    200 multiple promotion articles have been taken off since the investigation.
•    How media mentions impact small cap stocks is the topic.

•    Short: Organovo Holdings (ONVO) – was a client of one of the IR firms.
•    In its most recent equity offering – new risk factor disclosed – common stock has trading risk related to media (i.e. seeking alpha articles). 
•    Organovo is making an effort to remove negative articles.
•    Lot78 – LOTE – is an example of how a explosive promotion plays out – went from $1 to $24, purely out of promotions – crashed to five cents after the promotion ended. Lesson learned? No limit to how high prices can rise when stocks are promoted. Another lesson: easy to assume that share price is related to its prospects.
•    Why short Organovo? Heavy dilution likely coming, no revenues, and of course prospect determined by write ups. Organovo assets consist primarily of cash raised. IP is on the books at ~$110K. Only real asset is the $49MM in cash.
•    Organovo 1.0 started a few years ago to acquire IP Related to 3-D bio-printer. There wasn’t a ready market, Organovo 2.0 – attempted to sell a liver toxicology product with only $2 - $4MM total addressable market. Share price fell by 40% (was a $1B company). Revenue model has shifted twice since “2.0”.
•    R&D is only $1MM - $2MM per quarter. Biotechs with similar market capitalizations have spent on average ~$13MM per quarter versus $1-$2MM at Organovo. 
•    Only announcement with substance was there recent stock raise in August. Of course, they have been busy at investor conferences, their favorite is
•    JRP Securities initiated a lackluster initiation, with a “market perform” at $8 and no earnings forecast. 
•    As a key milestone for the CEO’s comp, he was to receive payments if the Company received sell-side initiation
•    148 articles posted on the Company – pure hype articles such as saying the toxicology business has billion dollars or more target market. Writers have also said that companies like McDonalds could buy 3D printed meat using Organovo’s “tech”, or that they could be bought-out at $15 - $16.
•    When there is not much written on the name, the stock drops. When a lot of written, the stock has risen. Purely independent bloggers are influencing the stock price.
•    Insider sales are rampant, they are eager to get out of the stock.
•    Risks to the short: they do have a lot of cash and can possibly raise more through a equity distribution agreement. So a low risk of a cash crunch.
•    Risk once they raise the extra $50MM – they could perhaps purchase a real business.
•    Organovo 5.0 – Pitch a new business concept.

Be sure to check out the rest of the Value Investing Congress presentations.

Richard Lashley's Presentation on Bank Plays at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Richard Lashley of PL Capital who pitched TARP Warrants, Metro Bank (METR), Horizon Bancorp (HBNC), and Intervest Bancshares (IBCA) .

Richard Lashley's Value Investing Congress Presentation

•    $200MM asset manager – 18 years of history, specialized in small cap banks. Shareholder activists in banks – which surprisingly is the third most active areas for activist investing. Former CPAs at KPMG – also did M&A at KPMG. One of the top ranked financial services hedge funds. Primarily long only.
•    Three crises in banking –early 90’s, LTCM and from 08-09. 
•    Average P/TBV – not back to the mid-point or average since 1992.  Believe we can get to 1.75x – 2.0x TBV average.
•    Average bank in their portfolio is at 1.09x – strategy is to sell their banks to a mid-cap bank at greater than 1.5x TBV.
•    A lot of acquisitions, generally one acquisition per day. M&A is going to happen in banking no matter what happens in the market.
•    Most banks sell for 10x post cost save earnings – as the acquirer can redeploy excess capital.

•    Idea 1: TARP warrants many are deep in the money. First warrant is JPM, strike at 42 - $18 in the money, and expire in 2018. What will happen? Book value will grow from earnings. JPM TBV today is 40, by FY18 will be around ~$64. Warrant trades for $20. Thinks it will trade for higher than 1.2x BV – should be at least a 16% IRR through 2018. Further, treasury has an anti-dilution clause, meaning the exercise price declines with a big dividend.
•    Capital One Warrants – 7% earnings growth, 30% payout, 20% IRR in the capital one warrants. For a 17% ROTCE business, thinks it is worth more than 12x PE.
•    Another warrant idea includes PNC warrants – minimum 25% IRR, with 7% earnings growth and assuming 13x PE multiple.

•    Small cap bank ideas: Metro Bank (METR) – filed a 13D, started buying a year ago, actively buying all three names. Has low cost deposits, 2.8B franchise, will benefit from higher rates. CEO is 73 years old – is going to meet with the CEO next week. The bank is located in PA. They are spending too much money, very expensive model being open 7 days a week. Efficiency ratio is 73% -very high, should be 60% - 65%. Value will grow regardless at $2 per share if nothing else happens. Assures us that the bank will be sold.

•    Horizon Bancorp (HBNC) – in the Russell 2000, located in Indiana and Michigan. Trading at 1.48x TBV, while peers trade much higher for high ROTCE banks. Stock is $22 – going to earn $2 per share. Filed a 13G but they like a CEO – could be a buyer or seller.

•     Intervest Bancshares (IBCA) in NYC/Rockefeller. It is a wholesale bank – gathers wholesale deposits. Very lean and mean, trading at 83% of TBV. Will benefit from margin expansion as high costs will run off. The Company may be booted off the Russell- will be buying hand over fist if that happens.
•    Generally buy MHC after the conversion occurs as it is difficult to set up deposits.
•    Look for second-step conversions- after the three years are up look for the sale of the business. 

Be sure to check out the rest of the Value Investing Congress presentations.

Lisa Rapuano's Presentation on Markel & Bed Bath and Beyond: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Lisa Rapuano of Lane Five Capital Management who pitched Markel (MKL) as well as Bed Bath and Beyond (BBBY).

Lisa Rapuano's Presentation at Value Investing Congress Las Vegas

•    Probabilities, know how much to bet and how to react – can you handle it psychologically. •    Think about what can go right- the probability – how much can we make? How much money can we lose, and what’s the probability – think of scenarios ahead of time.
•    Process leads to three outcomes – compounders, contrarian investments (what Lane Five is known for) and finally getting involved as an activist or being proactive. They have become more aggressive in this act.

•    Compounders – good ROIC, strong balance sheet, moats and strong capital allocation. Infrequent. Temperament requires to invest in these businesses” Generally boring, underperform in up markets – require patience to acquire when the price drops and patience to keep in it as it under performs.

•    Contrarians – priced very cheap, higher expected returns – lots of ways to make money, yet much greater variations between these outcomes. Can be less correlated to the market. Always some management team screwing something up. Have to be selective in turnarounds – see if the peers have a good business model and margins. 
•    Look for shareholder turnover, new low lists. Look for sell-side to give up on the name. Could be difficult to hedge. Patience for the turnaround, patience for entry and exit. Need to be resourceful as people don’t like to talk about these names and finally, you need to have humility. 
•    In regards to timing in contrarians – COCO example. Has been on the new low list for four years! Bought it at the first deep dip, triple downed two years and still sitting at the same price. Much longer and much worse. Time is killing the IRR.
•    One investment – waited for the new management team to come in and understood the business and incentive plan – patience for entry.

•    Activist engaged investments – generally talks with them tries to be collaborative, sometimes they need a push. This can work on the compounding side. This takes a lot of money for lawyers, you can become illiquid and it is a fairly large time commitment. Generally once you are on the board – generally worse than you think!
•    Why does Lane Five pursue several paths? Likes the way the portfolio comes together. If you are wrong about one – doesn’t sink you, further time cycles are different.

•    Compounder idea – Markel (MKL) the biggest position. Specialty insurer with an investment portfolio ran by Tom Gayner. Disciplined underwriter. Excess capital reinvested into equities at high rate of return. Bonus system – paid in 5 year trailing BV growth, in excess of 11%. Valued at an insurance multiple. Made an acquisition of Alterra – which significantly increased investable assets. Markel ventures is another growth leg – able to invest capital in private businesses.

•    Contrarian idea – Bed Bath and Beyond (BBBY) – a  home goods retailer – people think internet will outdate BBBY – their variant view is that BBBY is similar to home depot or goods, where people want to see the item in person, further they have strong pricing – and continue to be competitive vis a vis online competitors. Fabulous capital allocation – share repurchases and useful CapEx measures. Four other concepts which have good economics. BBBY trades lower on all multiples versus peers – even while having better returns than most. Unlevered FCF $1B used to repurchase shares. They don’t talk to the street – non-promotional mgmt. team. 

Be sure to check out the rest of the Value Investing Congress presentations.

David Neuhauser's Presentation at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is David Neuhauser of Livermore Partners who pitched Pacific Rubiales Energy (TSE:PRE) and talked about Occidental Petroleum (OXY) and Zargon (TSE:ZAR).

David Neuhauser's Value Investing Congress Presentation

•    Based Chicago – energy, financials, industrials focus.

•    Pacific Rubiales Energy (TSE:PRE) – Knows the Management team well.
•    Became attractive in the 1st quarter – took a large position or 10%. It’s been up 40% since the last couple weeks.
•    How do you extract value? Do the work – can’t simply say this is a cheap company and here is our time frame. Need to be proactive. 
•    One view - Management teams have been asleep at the wheel for a long time. Many are promotional. Focus on the downside. Worked for Leon Greenblatt out of school – focused on risk arb. and also bought big stakes in thrifts and filed 13Ds.
•    Livermore uses their vast networks to find opportunities and learn about businesses. Used their PE relationships like Wilbur Ross and Riverstone Holdings to help provide a level of conviction, etc. Further, they can introduce their companies to private equity funds, which is a benefit for both sides.
•    Some ideas they are focused on today – volt information sciences – unlisted $170MM market cap – 40% owned by the management team. Had to write a letter to the board. Had an accounting restatement in the past. Catalyst in relisting shares – operating margins to grow. Trades at $8 – TBV is $10, IV $15 - $20. Pressure the management team to create value.

•    Occidental Petroleum (OXY) – special situation 1 ½ ago. Break-up value is higher. Chairman tried to reinvigorate himself and take over the CEO spot from an excellent CEO. Sent a letter and the Chairman exited. Now OXY is spinning off assets.

•    Zargon (TSE:ZAR) – small energy company focused on exploitation - not trying to find oil, but use techniques to further extract oil.
•    Street didn’t like the name. Pressed management for a buyback which is in place. CEO owns 5%. Yield is 9%,
•    Met with management to hit achievable production targets and a sustainable dividend. Trades around $8.
•    New project 400 bpd coming online this year.
•    Heavy CapEx spend now behind them.
•    Should be viewed as a low-decline stable oil company.
•    Oil companies need low-decline supply.
•    Look at NAV on 2P reserves. NAV around ~$12 per share.
•    EV/EBITDA – in line with comps, would be worth $13 per share.
•    Also looking at Talisman Energy – working with Icahn’s team to find every avenue to unlock value. They do have a strong management.
•    Competitive advantage – bring PE guys in.

Be sure to check out the rest of the Value Investing Congress presentations.

Arnaud Ajdler's Presentation on Hill International: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Arnaud Ajdler of Engine Capital whose presentation was entitled "Investing in Change" and he pitched Hill International (HIL).

Arnaud Ajdler's Value Investing Congress Presentation

·         Arnaud is a former partner of Crescendo Partners, an activist value investing firm.
·         Launched engine in July 2013 – a special situations value fund focused on change.
·         Why is change important? It is a catalyst for the value gap to close – increases the odds of avoiding a value trap.
·         Three buckets.
·         Proactive- be the change agent like Crescendo. Arnaud has waged over 6 proxy contests, and has served on multiple boards.
·         Anticipatory – Management announces change that is not priced in or some capital structure event.
·         Reactive – Follow-in other activists and other opportunities.  
·         Always ask why the company is mispriced –identify the problems in order to fix them or find solutions. Arnaud has a LT horizon.   
·         What is his edge? Experience.   
·         In this environment many factors can contribute to companies creating value – i.e. companies focusing on a core competency, or events like restructurings, spin off of a division, or return of excess cash.  
·         It used to be hard to get meetings with large firms like Fidelity– now they are open to shareholder activists along with ISS.   
·         Different types of change.   
·         Some examples include operational, capital allocation, capital structure, strategy and finally governance.   
·         Some example of stocks Arnaud has invested in – IRG – a Canadian franchisor for which he is on the board, STC a title insurer where he is on the board and helped implement a buyback program, among others.   
·         Security Selection – focuses on FCF generation, low operating margins which can improve, poor capital allocation (can improve), lazy balance sheets, corporate discounts or a take-out candidate.   

·         Presented Hill International (HIL) – he was on the board from 06-09 knows the company.   
·         A global project management firm – manage projects, low capex model, for which they get paid 2% -3% of the project value.   
·         Owner operators – management team owns 30% of the business. Their incentives are aligned with shareholders.   
·         Two businesses the larger project management business and a smaller construction claim business.   
·         Some positives: diversified business – by project, etc, high barriers to entry, strong ROIC, fast revenue growth and backlog visibility.   
·         Currently trades around $5.4 or a ~$218MM market cap. Cash is ~$55MM and debt is around ~$150MM. Trades at 6.2x FY14E EBITDA and 5.4x FY15E EBITDA.   
·         Peers trade for 10x EBITDA.   

·         Why is this cheap?   
·         (1) No US peers, hence sell-side analysts use wrong peer group such as E&C companies or consulting firms like FTI. This is a project management firm (capex light).   
·         (2) Has a Libyan receivable of $60MM for which it hasn’t collected on (due to issues in the Country of course). Has since started to receive cash - $10MM and expect to eventually collect the rest. Arnaud has completed diligence on Companies in similar situations.   
 ·         (3) Leverage – When revenues declined due to the Libyan issue, the Company broke its covenants and had to refinance into expensive debt. This is an opportunity as the Company will most likely refinance over the next year or two, which should decrease interest expense.   

·         Catalysts?   
·         (1) Recovery of the Libyan receivable   
·         (2) Refinance of debt.   
·         (3) Revenue growth – one strong point about the business, revenue visibility through the backlog.   

·         Valuation wise – believes there is ~80% upside – cheap on an absolute business as it is hard to find cheap quality businesses trading below 7x EBITDA.   
·         On FY15E FCF – thinks they will generate $33.6MM of FCF after maintenance capex, or at a 10x multiple would equate $8.40 per share (pre-w/c changes).   
·         Risks? Doesn’t look like the business is getting sold, thinks this would garner a strong price given it is a scarce asset. Management team is focused on acquisitions, think this will distract them from reaching 10% EBITDA margins. Further, insider selling, but they still own a lot of stock.   
·         In regards to idea generation: Look for Companies trading at cheap multiples, look at special situations like spin offs, looks at 13Ds/ delayed annual meeting filings, and 13Ds filed by Private Equity firms.   
·         An example of making money off a 13D filed by a PE firm – O’Charleys and Baker. Woke up one morning and saw that Fidelity National Financial filed on O’Charleys, signaled that they were a potential acquirer and ultimately purchased the asset. Baker is a similar situation, DC Capital filed the 13D, Arnaud contacted the sponsor who informed him that they have a similar portfolio company they want to merge. Offered to buy the business in the mid $20’s, ultimately paid a price in the $40s.

Be sure to check out the rest of the Value Investing Congress presentations.

Monday, April 7, 2014

Eric Andersen's Forrester, OFS Capital & Hartmann Presentation: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Eric Andersen of Western Standard who pitched Forrester (FORR), OFS Capital (OFS) and Hartmann.

Eric Andersen's Value Investing Congress Presentation

•    Looks for companies below $500MM, underfollowed, lack of sell-side analysts. Utilizes screens which follow past successful investments. Database of 500+ firms.
•    Focus on downside, quantify the analysis, understand the current business, and analyze the stability of business and management quality.

•    Idea: Forrester (FORR) – high retention and recurring revenue, large market with secular growth.
•    Net cash balance sheet and FCF
•    Forrester is a leading tech research and advisory business.
•    No customer concentration.
•    Business tech – traditional tech research. Marketing strategy is 43% of sales.
•    Too many changes too quickly. Went from product rep sales force to a client rep system.
•    Ramp up on sales force – takes 12 – 18 months to get trained and running.
•    Earnings growth – revamped recruiting and sales model – well received by clients.
•    Confident they can drive double digit bookings/revenue growth.
•    At a peer multiple worth $48 per share – downside is protected by a stock repurchase program, bought 16.2% at prices slightly above the current price.
•    $80MM in cash returned in FY14 estimated.
•    Since 09 – returned 42% of market cap in buybacks/dividends.
•    Risks: sales ramp could not materialize, other competitors – however many are also customers.
•    Limited float – owner –operator who doesn’t sell
•    2% dividend, plus buyback and earnings growth

•    Next Idea: OFS Capital (OFS) – busted IPO – skewed risk/reward 60-80% return
•    Trades at 80% of BV
•    Dividend paid to wait
•    Externally managed BDC – middle market lending
•    Sold off due to SBIC license – which was received in December.
•    SBIC loans have 12-16% rates and return on equity of 20% or more.
•    Access to SBA debenture program.
•    NI should grow as the funds are invested.
•    External manager owns 30%.
•    CEO owns 10% directly.
•    Industry checks reveal positives on the management and strong returns.
•    Things they should at 126% of TBV/11x earnings.
•    Risks: execution, interest rate risk, dilution and small business could be hit hard in a downturn.
•    Mitigation – can’t raise cash below bv without shareholder consent.

•    Hartmann – Danish company – 10.5% FCF yield/7.5% with growth capex.
•    Packaging company (packaging for eggs).
•    40% market share in their space. Made out of recycled paper – strong, versatile and environmental.
•    Barriers to entry – customer relationships, quality, and technical know-how.
•    Broad portfolio – six production facilities.
•    Growth drivers – premium packaging (premium eggs carry higher margins) molded fiber is gaining share in the United States vs. foam.
•    Increases it USA capacity by 33%.
•    Increasing consumption of eggs in Europe. Cheap form of protein.
•    Prior management terrible at capital allocation and operations. Restructuring program was initiated and went back to “basics”
•    ROIC has grown to 20%, believe it is sustainable.
•    At a peer multiple – worth 270 kroner per share.
•    Risk: Paper pricing and energy usage. Low growth industry and sales tied to commodity.

Be sure to check out the rest of the Value Investing Congress presentations.

Thomas Russo's Presentation at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Thomas Russo of Gardner Russo Gardner who talked about global value investing.

Tom Russo's Value Investing Congress Presentation

•    Core principles – fifty cent dollar bill, capacity to reinvest and capacity to suffer.

•    Capacity to reinvest is one of the most exciting factors. In the past sold some domestic names which couldn’t reinvest in the long term (focus on international brands, especially consumer products).
•    Has long owned spirits companies, owns four of them currently. Entering the China spirits market – hasn’t deeply penetrated the market yet. Over-time should develop. Over half a billion cases in the Chinese market – plus express a desire for these beverages (i.e. cognac).
•    The mainland Chinese consumers are on the move – over 100 million will travel around the world and experience products such as Johnny Walker/Hennessy and will be natural brand ambassadors. That is just the Chinese market alone.
•    Indian market is another huge potential market, only 1% of whiskey is from Scotland.
•    Need to invest the right amount of money to grow the business – will lose money at the start (upfront costs like distribution, marketing, etc.).  Very expensive early on. It burdens income in the beginning. The right way to enter? Managements need to have the capacity to suffer, being able to take a hit to earnings in order to invest in new investments. I.e. – don’t be short termed.
•    Companies who have been able to invest in growth in a smart amount, generally are family-controlled companies, for which the street and activists cannot interfere.
•    60% of portfolio is family-controlled businesses.
•    General Mills won over decades the yogurt war, relished the $300MM earnings contribution from yogurts at the peak and some point along the way they missed the greek yogurt trend. Didn’t devote money to protect the segment – believed they didn’t have flexibility. Greek yogurt was allowed to grow, to the point it is untouchable. General Mills had the capacity to reinvest in that category and missed it. Now Chobani will garner a $5B valuation (est.).

•    Capacity to suffer example – BRK’s equity index put options a prime example, Warren got premiums to invest for 15 years, while taking a couple years of reported earnings hit (the end sum from premiums invested is what needs to be viewed instead).
•    Mastercard and Nestle are examples of companies which reinvested into their business and temporary depressed earnings for LT growth.
•    Also like businesses who are tax conscious.
•    1999 was Tom’s best year ever – he was down 2%, but the setup presented was amazing (i.e. buying opportunities).
•    Why aren’t these principles followed? Wall Street is focused on short term results. Culture had changed to chasing quarterly results.
•    One of Wall Street’s mistaken emphasis – focus on R&D as a percentage of sales.
•    Reckitt Benckiser vs. Nestle – The Streets mistake on working capital as a percentage of sales. Talks on how analysts commented on a few CPO companies’ working capital practices, Nestle for instance. They saw Reckitt release working capital and questioned others as to why they are not doing the same. As Nestle grows into a higher mix in developing markets – they need to have working capital to keep product stock as distribution costs and stocking costs are higher. As they grow in these markets, need to grow working capital.
•    Cash Flow conversion ratio – another street mistaken emphasis.  Tom wants companies that can reinvest their cash – while the street wants a majority of cash to be distributed.
•    Percent of business from new products (within 3 years) – another mistaken concept.
•    Avoid family controlled company – another Wall Street mistaken concept. Talked about the differences between Comcast and Adelphia (went bankrupt). As investors we can gauge the caliber of people running the business.
•    No ONE variable is the answer, you need to look at all the factors to stay aloft.
•    To summarize – find businesses with a longer term horizon.

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Sahm Adrangi Short Bank of Internet Presentation: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Sahm Adrangi of Kerrisdale Capital who pitched a short of Bank of Internet (BOFI).

Sahm Adrangi's Value Investing Congress Presentation

• Posting a short – originally long this company. One point the largest stock position. Stock is up 15x since when they originally bought it. 6x P/E less than 1x TBv and no   sell-side coverage when they first bought it. Went from $100MM to 1.2B, 26 PE 4x   TBV. Largest short. Bank of Internet is that short (BOFI).

• Owns a wide variety of internet banks, one branch in San Diego. Offers one of the highest savings rate (not the highest). Sources loans through branded websites and through the wholesale correspondent channel. LTM NI is $47MM versus 1.2B market cap.
• Key part to the thesis – BOFI is over-earning. Why will there be pressure? On the asset side and liability side. Yield on the assets inflated by MBS purchased three to four years ago (bought distress RMBS) – particularly high securities yield. As they roll off NIM declines. Loan book focused on jumbo mortgages – increasing competition. Either yields will decline or adverse credit quality. Loan provisions are thin. Long duration – Deposits will re-price upwards, won’t be able to raise NIM   without taking interest rate and other risks. Increasing competition among online banking as well will hurt NIM.
• (1) BOFI’s asset yields not sustainable - made attractive RMBS investments. Yields have started to decline, believe it will continue to decline. Loan yields and securities are in-line with other banks ex. RMBS purchased in the downturn. Asset yield versus   its peers 4.4% for BOFI versus 2.2% for their peers. 
• (2) Jumbo loans are a material driver for BOFI – competition is increasing. More and more banks are competing – either yields decline or BOFI takes on greater credit risk.
• (3) Another risk – BOFI is/may be taking on longer duration assets. Banks generally have a mismatch, but as interest rates drive up, deposits re-price, but you have to wait for the loan to mature before you can re-deploy capital. Mentioned that BOFI looks like it has made bet on declining interest rates.
• (4) Liability side – Deposits are less sticky – plus BOFI can’t offer the relationship/cross-sell services. Plus, it’s much easier to set up an online bank account versus physical account.
• (5) New Competition is weakening BOFI’s position. Large lenders like GE Cap, Ally Bank, CIT, etc. are going after the online banking space. U.S. regional banks are launching online divisions as well. Believes GE or Ally/other providers will capture new deposits as well. BOFI isn’t in the top 10 for a lot of segments.
• (6) Organic growth has stalled 
• Putting it all together, NIMs will fall.
• Outside of NIM – a quarter of operating income came from mortgage gains on sale. Problem with this, is that mortgage origination has been declining due to Fed tapering and rising rates – will be a headwind.
• May be under-reserving on NPLs. Only 55 bps allowance for loan losses versus gross loans, competitors are higher. 
• Valuation multiples – 4x TBV is higher than even its peers – twice as high. Think there is a lot of retail investors in BOFI and Motley Fool talk.
• NPV of loan book is ~$400MM 
• 7% short interest
• Risk: good management team – thinks 2.5x TBV reasonable valuation. Stock has ran up largely over the past couple months. Think there may be some more short term volatility. Think they can pull levers to grow perhaps, but at 4x TBV – not justified. Further, NIM pressure will probably offset growth. 

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Whitney Tilson's SodaStream Presentation: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Whitney Tilson of Kase Capital who pitched long SodaStream (SODA).

Whitney Tilson's Value Investing Congress Presentation

•    SodaStream (SODA): Home beverage carbonation system – makes money off the machine, the bottle, the carbonation and the syrup. The carbonation and syrup lead to repeat sales. Razor/blades model.
•    70% cheaper once you purchase the machine. 25 cents per carbonated liter. 30% cheaper if you add flavor versus other products. Convenience – you don’t need to carry around bottles, etc.
•    A lot of choices flavor wise. Environmentally friendly.
•    Target market? People who like to drink sparkling water. Households with multiple people – flavoring or the soda drinker in the household. 
•    It is NOT competing against coke and pepsi – they do sell coca-cola variants, but in Whitney’s experience, not the best taste – however the other flavors taste good and are popular.
•    SODA looks like Decker’s to Whitney.
•    Beaten down stock – has fallen tremendously, with a high short interest.
•    Mistaken view that it is a fad – United States don’t realize the business has a strong share overseas, only 1-2% share in the USA. 393 people surveyed for SodaStream – people love their SodaStream machines and use / recommend them frequently.
•    Are the problems fixable?  USA sales growth is decelerating – believes it is temporary, due to the worst holiday selling season and 16% growth isn’t bad! In the second half of FY13, brought on with Wal-Mart. Plus, marketing and ad spend didn’t deliver. Europe as a matter of point grew 38% YoY. Secondly, SODA did not deliver on gross margins. Missed margins on machine sales as they wanted to get machines out to consumers – drive unit growth for the consumable business (syrups/carbonation). Whitney believes this was worth the cost. 
•    Enormous Global Market: a lot of white space for future growth and market penetration.
•    Position of Market Leadership : SODA owns the market, no real competitors. Large active user base.
•    Attractive economic characteristics : 50% gross margins, not capital intensive, decent profit margins. Healthy balance sheet. Further, attractive growth opportunities, YoY growth story for the past years. Flavor is the highest margined business (margins are not broken out). In Switzerland a mature market, 80% of sales or more are CONSUMABLES – 25%+ operating margins. USA generates 5% operating margins give or take, due to machines as a mix of sales.
•    Moat? Co2 cartridges require expertise and reverse logistics as many countries consider these items dangerous, large installed base, industry know how and the brand name.
•    Samsung one example of a company that is partnering with SODA stream to install in their refrigerators.
•    Valuation – doesn’t look cheap, trading at 22x trailing earnings guidance is for 3% growth, EBITDA growth ~15%. Looks exp. On a PE basis, fairly valued on EBITDA basis. Why is this cheap? Brings up the GoodCo / BadCo example. You should look at the businesses separately.
•    Western European business – 31% growth last year, 33% previous – their cash cow mature market. Thinks they earn 2.34 a share out of Western Europe (versus 1.82 total business).  15x multiple on that business ~$35 or roughly the entire share price today. You get the USA biz for free. •    Another way is to look at the refill business – 7mm installed base, trading around ~8x refill business.
•    Doesn’t think the Coke/Keurig Cold competition – no product out yet. Chemical carbonation isn’t on par with the later, plus costs are expected to be higher.
•    If you want a cup of coffee you have to make a pot – a waste, so Keurig makes sense. If you want just a coke, you can purchase a can or go to a vending machine, what is the value add from Keurig Coke? Doesn’t make sense to Whitney.
•    What could go wrong- poor earnings next quarter and inventory levels. Q1 earnings will be bad, perhaps it will offer a better entry point. 

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Tim Eriksen Awilco Drilling Presentation: Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Tim Eriksen from Eriksen Capital Management who pitched a long of Awilco Drilling.

Tim Eriksen's Value Investing Congress Presentation

• Eriksen looks for FCF, high margins, strong management, and a near term catalyst –  adopted from Mario Gabelli

• Other interesting situations such as forced sales, spin offs, unlisted stocks – where   big investors don’t invest in.

• Briefly spoke to how Warren invested in smaller cap companies in the early days.

Awilco Drilling Pitch:

• Owner operator, trades at a 20% dividend yield and ~5x earnings.
• UK Owner and operator of two semi-submersible drilling units.
• Owners were originally got out in the peak during 08 and returned to the business got in FY10 when they bought two rigs from Transocean, whom was a forced seller. 
• Awilco trades OTC and OSLO. 
• Transocean tried to sell the two rigs in 08, but the deal fell through. In FY10, Awilco got the rigs for under $300MM. The original purchase price was materially higher. 
• Transocean in FY07 carried the rigs at ~$600MM, Awilco paid a third of the price!!
• One rig was upgraded, and spent $94MM to pay for the upgrades financed from a private placement. In FY13 the Company started trading OTC. 
• In May paid first dividend of $1 per share. Just issued bonds $125MM for ~7%.
• Are they paying out all cash? No, there are some non-cash expenses so they are paying under actual cash flow.
• Went from ST contracts in 2012 – wasn’t great. Able to get longer term deals and higher contract rates. Rates went from 250k a day to 350k per day. $60MM in rev,   $20MM op profit per quarter. 
• Willphoenix -3rd gen rig. Willhunter – built in 1983, upgraded twice. 3rd gen rigs primarily mid-water semisubmersibles.
• Today only deep-water and ultra-deepwater rigs are being produced – only 10 mid water made in the past 10 years (could be 20).
• Rigs were built in the 1980s. All mid-water rigs built in the 70s and 80s. So not   unusual – and have been upgraded. 
• Need to go under special surveys every 5-6 years, so there is some downtime. 
• Think it is a 15 year rig life, but with technology and upgrades who knows.
• UK market has 17 rigs. Not easy to move from one location to another – significant costs. Higher restrictions to enter UK market. Some sources say $100MM to move rig   from gulf to UK.
• UK market near 100% utilization. In 08-09 bottom rates got down in $250k - $350k.   At $250k – still make 50 cents earnings per quarter.
• Astute management sold at the peak, bought at the bottom. A dip would be good would allow them to possibly buy rigs for cheap again.
• Transocean idles rigs to keep market pricing strong – creates some stability for the market. 
• Most rigs in the UK market are 2nd and 3rd gen -Rates are lower for 2nd gen vs. 3rd gen – great way to get a feel of what could happen 15 to 20 years out.
• Clear picture of revenue- Awilco has contracts high quality clients and a $700mm backlog
• 30mm shares outstanding management owns ~ 48%.
• Risks – contracts terminated? Not easy to do/low likelyhood
• Commodity risk.
• Supply and demand could change – low 2nd gen would probably fall off first. 
• Material risk- if one rig breaks down would hurt revenues. Then of course, operating   breakdown, regulatory risks. Carry insurance 
• Diamond offshore (DO), Ensco (ESV) comps, all are different no apples to apples comp.
• $21.7 price, $600mm market cap, and a 20% yield locked in for three years, 60%   of capital will be returned to shareholders. Confident that the stock won’t be down   over 3 years. Not a cigar butt but a cigar. 20 year life at least.
• Big part of thesis is current yield –partially due to no taxes – where they are domiciled.

Be sure to check out the rest of the Value Investing Congress presentations.