Wednesday, July 2, 2014

What We're Reading ~ Analytical Links 7/2/14

Spy the Lie: Former CIA Officers Teach You How to Detect Deception [Philip Houston]

On curating your investment resources [Washington Post]

The Buffett valuation indicator: some interesting odds and ends [Advisor Perspectives]

The unpopularity of patience [Clear Eyes Investing]

A look at TIVO [Micro Fundy]

How to win by doing less [Morgan Housel]

Shinzo Abe's bid to shake up corporate Japan [NYTimes]

Cash no longer king as stock, asset swaps drive takeovers [Bloomberg]

Lessons from John Malone [Simoleon Sense]

Target's leadership lost its way long before data breach [WSJ]

The US consumer is on a tear [Business Insider]

Household net worth hits record high [Business Insider]

Embrace stock market investing as a lifestyle [Montreal Gazette]

Investors seek new hedges in unnatural market calm [Reuters]

Monday, June 30, 2014

Peltz's Trian Discloses New Stake in Bank of New York Mellon

Nelson Peltz's activist investment firm Trian Partners has filed an amended 13F with the SEC.  Per the filing, they've disclosed a new position in Bank of New York Mellon (BK).  This amendment was made to their first quarter 2014 13F filing.

This means that they owned 9,330,230 shares as of March 31st, 2014.  In their original Q1 13F, Trian had filed for confidential treatment of their position with the SEC.

For more on this firm, we've posted some of Trian's Q1 letter.

Per Google Finance, Bank of New York Mellon is "a global financial services company. The Company divides its businesses into two principal segments: Investment Management and Investment Services. It has an Other segment, which includes credit-related activities, the lease financing portfolio, corporate treasury activities (including its investment securities portfolio), its equity investments in Wing Hang Bank Limited and ConvergEx Group, business exits and corporate overhead. Its two banks are The Bank of New York Mellon, which houses its institutional businesses, including asset servicing, issuer services, treasury services, broker-dealer and advisor services and the bank-advised business of asset management, and BNY Mellon, National Association (BNY Mellon, N.A.), which houses its wealth management business. In May 2014, the Company acquired HedgeMark International, LLC, a provider of hedge fund managed account and risk analytic services."

Soros Fund Seeks Sale of Penn Virginia

George Soros' family office Soros Fund Management has filed an amended 13D with the SEC on shares of Penn Virginia (PVA).  Per the filing, Soros' Chief Investment Officer Scott Bessent has sent a letter that pushes for a sale of the company. 

Soros Fund's Letter to Penn Virginia

The letter reads:

"June 25, 2014  
Board of Directors
Penn Virginia Corporation
4 Radnor Corporate Center
100 Matsonford Road, Suite 200
Radnor, PA 19087  

Gentlemen and Lady:  

We are extremely disappointed that, as indicated in the letter we received from Mr. Cloues dated June 18, 2014, Penn Virginia Corporation ("Penn Virginia" or the "Company") has rejected our suggestions to provide additional financial incentives to its management team in the event of a sale. We made those suggestions to further align management's interests with the best interests of shareholders, as we have previously communicated to you our belief that you should explore strategic alternatives as a means to maximize shareholder value. We believe that the optimal means to maximize value is for the Company to be sold. By reasserting in the letter your belief in your operating strategy, it appears to us that you are not going to undertake a formal evaluation of Penn Virginia's strategic alternatives.  

As the largest shareholder of Penn Virginia, we are deeply concerned by the Company's recent missteps. Management's presentations at several recent conferences have been underwhelming, culminating in a wholly avoidable revision of its investor presentation type-curve disclosure.1 We believe that these investor relations disasters are the reason why the Company’s stock dropped 14.4% from $16.48 on May 29, 2014 to $14.11 on June 10, 2014, underperforming its peer companies by 15% over that period.2  

In light of this poor stretch of share price performance, which we believe was driven almost entirely by the Company’s disappointing investor-relations effort, we were then astounded by the timing of the June 10, 2014 press release announcing Penn Virginia's proposed private offering of convertible preferred stock. The issuance of this convertible preferred stock was at a significant discount to inherent value and diluted existing equity holders by approximately 21%.3  While the timing of this transaction was particularly egregious, the strategic rationale  

__________________________   1 In presentations, the Company revised down its reported type-curves, showing third-party numbers without explaining to investors the reason behind the decrease. It is common in the E&P industry for third-party type-curve estimates to be lower than company estimates. However, without proper disclosure, this revision was taken by investors as a signal that the Company’s wells had started to deteriorate – which we believe is very much not the case. 2 The SIG Oil Exploration & Production Index (“EPX”) rose 0.6% from 537.04 to 540.00 in the same period. 3 $325mm converts at $18.34/share = 17.72mm shares, versus previous fully diluted share-count of 85.7mm shares.      

was not much better. The Company's intended use for the proceeds of this offering is to finance the acceleration of its development program and increase its lease acquisition effort in the Eagle Ford Shale. Based on management’s own estimates for the present value created by this accelerated drilling program, however, it is clear this decision has destroyed shareholder value.  

We believe that the shares of the Company are fundamentally undervalued, and that issuing equity or equity-linked securities at these prices to accelerate drilling in the manner contemplated fails to optimize per-share value. Other potential owners of this asset have a lower cost of capital and better scale in the Eagle Ford Shale and are clearly its optimal owners. Regrettably, the board’s decision to grow in this dilutive manner indicates to us that it is more interested in “empire building” than maximizing shareholder value.  

The board apparently views this decision as one targeted at building the Company for the long run. But we note that this board of directors has presided over a long period of decline at Penn Virginia, which has resulted in a current stock price that is lower than the stock price ten years ago.4 This record of failure to create value over the long term is not a track record that justifies making dilutive transactions today in the hopes that someday in the future the enhanced scale will somehow benefit shareholders more than a sale today would.  

Again, we believe that the Company should promptly pursue a sale in order to maximize shareholder value. We believe there are numerous potential acquirers who would be interested in acquiring the Company at a material premium to its current trading price, as demonstrated by any number of precedent transactions in the industry. Decisions about the future direction of your development program should be left to the buyers, who enjoy a considerably lower cost of capital and can therefore accelerate drilling in a more accretive manner.  

The time has come for the Company to put itself up for sale as the surest path to maximize shareholder value. Should you fail to start exploring sale alternatives, we reserve the right to take any and all actions we believe necessary to ensure that shareholder value is not further eroded.  

Very truly yours,  

/s/ Scott Bessent
Scott Bessent
Chief Investment Officer"

Capitalize For Kids Investment Idea Contest

Just a head's up for readers that in conjunction with the upcoming Capitalize For Kids conference, they are also running an Investment Idea Contest we thought many of you would be interested in with the opportunity to allocate some of the winnings to the Hospital for Sick Children.  Here are the details:


Winner gets $20,000, complimentary admission to the conference, and a 1-year subscription to Impact Research

2nd place gets $5,000, complimentary admission to the conference, and a 1-year subscription to Actionable Alpha

3rd place gets complimentary admission to the conference  and a 1-year subscription to Actionable Alpha

Eligibility:  You must be employed full-time in the institutional investment industry and have permission from your employer to compete.  MBA students are also welcome to enter.

Deadline:  Ideas must be submitted by July 31st, 2014

Apply: You can view more details and apply for the contest via this link.

Embedded below is the flyer for Capitalize For Kids' Intelligent Investing Challenge:

Good luck!